Manufacturing shows effects of global economic slowdown and spiraling oil prices

LONDON – Growth in European manufacturing sectors eased in September, as the global economic slowdown hit exports and high oil prices squeezed margins, according to surveys of purchasing executives. The Reuters Eurozone Purchasing Managers’ Index (PMI), released yesterday, showed the bloc’s manufacturing sector grew at its slowest pace in seven months, while the British sector grew at its slowest rate in more than a year as domestic demand fell. The surveys followed a PMI report on Thursday which put manufacturing growth in Japan at its slowest rate in a year on weaker export demand, in particular from China. The closely watched Bank of Japan «tankan» survey of business sentiment on Friday offered some comfort on the Japanese economy after the key diffusion index came in at plus 26 for September, the strongest since May 1991. But sentiment for December was less encouraging with the gauge set to slip back to plus 21. (Later in the afternoon, the Institute for Supply Management (ISM) reported that US factory activity had eased just slightly, with its headline index falling to 58.5 percent in September from 59.0 in August, suggesting that the US economic recovery was gaining some traction and slightly beating forecasts.) «The US is in a better state than the European economy, but the ISM is going in the wrong direction, so again there are concerns there,» said Jonathan Hoffman at RBS Financial Markets in London ahead of the ISM report’s release. «The overall picture suggests growth continues to moderate,» said Lorenzo Codogno at Bank of America in London. «Oil is probably the main variable for the slowdown in manufacturing growth but it’s also a matter of slowing global demand. Economies in China, Asia and Japan are all easing, which will affect the outlook for export demand.» The eurozone index fell for the second consecutive month to 53.1 from 53.9 in August, the British PMI edged lower to 52.2 from 52.8 and the Japanese index dipped to 53.6 from 54.9. National PMIs showed slower manufacturing growth in Spain, Ireland, Russia, Greece and Austria. (Greek manufacturing expanded for the ninth month in a row in September but at a slower pace, boosted by output and export growth, a monthly survey of around 300 companies by NTC Research showed yesterday. The Greek Purchasing Managers’ Index slipped to 51.7 in September from 52.6 in August.) Oil prices, which touched record highs of over $50 a barrel earlier this week, have inflated firms’ costs. But firms have only been able to pass on some of the increases in raw material prices to customers, putting further pressure on profit margins. Input prices jumped to a nine-year high in Britain and also soared in the eurozone and Japan. «The rise in (input prices) looks related to high oil prices which have damaged sentiment. Output prices were only up slightly so margins are being squeezed,» said Paul Mortimer-Lee at BNP Paribas in London. «The worry will be about whether the rise in oil prices is damaging global growth.» Firms continued to extract as much output as they could out of existing staff rather than expand work forces. Employment fell in the eurozone and Japan, and at 50.1, improved only marginally in Britain. «The key impact we’re seeing… is pressure on profit margins, with manufacturers unwilling to take on staff while cost pressures are rising in the supply chain,» said Chris Williamson at NTC Research, which compiles the data for Reuters. While rising input costs may spark some fears about inflationary pressures, this is unlikely to spur rate hikes in the eurozone in the near term. «The ECB will not be too concerned about the first round effects of higher oil prices but will be more concerned about the impact it has on wages,» BNP’s Mortimer-Lee in London said. «But with the labor market in the eurozone being pretty slack, the impact will be rather limited.»