Manufacturing grows

LONDON (Reuters) – Manufacturing in the eurozone put on its strongest performance in over three-and-a-half years last month as a weaker euro helped boost exports and consumer demand improved in France, a survey showed yesterday. The Reuters Eurozone Purchasing Managers’ Index, which measures business activity in manufacturing, rose from 54.0 in April to 54.7 in May, its highest since October 2000 and confounding economists who predicted a fall to 53.8. «The key driver of manufacturing growth remains very much the export sector,» said Chris Williamson, chief economist at NTC Research, which compiles the survey of some 3,000 firms for Reuters. «There is plenty of scope for increases in the coming months if we can get the consumers to become more confident and boost their spending in countries like Germany and Italy.» NTC said the index’s reading was consistent with 2 percent year-on-year industrial production growth. Such a level is sustainable over the long term and backs the argument that the European Central Bank should take a wait-and-see approach on interest rates. The ECB is widely expected to hold rates steady at 2.0 percent at its next meeting tomorrow. «It’s another reason for the ECB to leave rates on hold,» said Mark Wall at Deutsche Bank in London. «I can’t see them arguing in favor of cutting interest rates right now. Inflation has picked up, albeit largely because of oil, and we are seeing a mixed backdrop as far as business surveys are concerned.» The PMI survey, which covers eight eurozone countries accounting for around 92 percent of the 12-nation bloc’s manufacturing activity, showed companies benefiting from improved demand from the United States and Asia thanks to the global upturn. Expansion in the Greek manufacturing sector slowed down slightly in May, as the local PMI fell to 53.3 from 54.5 in April. «May’s data pointed to a further month of sharp production growth in the Greek manufacturing sector. For the fifth consecutive month, new orders to panel members expanded in May. Panel firms named, in part, a more buoyant market and success of promotional activity as the main reasons for May’s robust growth. Growth of new export orders remained sharp during the month,» the local survey said. A weaker euro has helped companies tap into foreign markets by offering competitively priced goods. The euro has retreated to around $1.21 currently from a February peak of above $1.29. «It seems that the weakening of the euro… was helping companies win new orders overseas,» said NTC’s Williamson. But he added, «Whether that will continue is debatable because we’ve already seen the euro begin to rise again and if that continues it may curtail some of that growth.» Given exports’ dependence on volatile exchange rates, the eurozone economic recovery will remain fragile until domestic consumer demand picks up. In France, where the headline PMI rose two full points to 55.5 in May, its highest since October 2000, there are signs that consumers have finally started to spend more of their cash. «Strong consumer demand and good export growth… helped push France to the head of the growth table,» said Williamson. «Germany and Italy, on the other hand, are still seeing weak consumer spending and that is limiting overall growth in the eurozone.” The German index rose to 56.2 in May from 55.3, while the Italian PMI edged up to 52.8 from 52.5.