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Southern laggards drag on euro zone factory recovery

By Jonathan Cable

LONDON (Reuters) - The fledgling recovery among euro zone factories stumbled slightly last month, held back particularly by the economic laggards on the bloc's southern fringe, surveys showed on Tuesday.

Manufacturing growth in Italy and Spain, the euro zone's third and fourth biggest economies, eased off in September, suggesting economic recovery there remains fragile. Battered Greece's contraction deepened.

In France, the region's second biggest economy, factories edged closer to pulling out of a 19-month slump but were still contracting.

Germany, Europe's largest economy, grew but saw the pace of growth ease slightly from August. It was the result, some analysts said, of weakness to its south.

"Italy disappointed, Spain ditto. Germany has been caught in the backwash ... so no real improvement - it's pretty much 'as you were'," said Peter Dixon at Commerzbank.

"There were some positive signs but we need more information before we can say that this definitely marks a turning point."

Irish factories chalked up their fastest pace of growth in 14 months while Dutch output hit a 29-month high.

Italy is struggling to emerge from its longest post-war recession and is again in political trouble, with Prime Minister Enrico Letta battling to stay in office after centre-right leader Silvio Berlusconi withdrew his party's five ministers from the government.

Spain returned to growth for the first time in two years in the third quarter, the government said last week, but its unemployment rate remains by far one of the worst in the euro zone, rivalled only by Greece.

Euro zone unemployment held flat at 12.0 percent in August after easing in July and European policymakers had made job creation their top priority for restoring sound growth. But in Spain and Greece unemployment is still above 25 percent.

"It's indicative of an economy which is climbing out of a deep hole," said Dixon, on the euro zone as a whole.

"If that can be sustained, then wonderful, but I think it is too early to talk about a significant turnaround in the labour market," he said.

The euro hit an 8-month high against the dollar on Tuesday after U.S. lawmakers failed to agree a compromise bill to fund operations, making Europe's exports more expensive and thus less attractive.

Across the channel and outside of the currency union, growth in Britain's manufacturing sector eased slightly in September from a two-year high the month before. (GB/PMIM)

And in China, manufacturing activity expanded only slightly last month, raising concerns a nascent economic recovery may be foundering and data due later from the U.S. is expected to paint a similar picture.


The Eurozone Manufacturing Purchasing Managers' Index (PMI), for which data company Markit polls thousands of manufacturing companies, dipped to 51.1 in September from August's 26-month high of 51.4, in line with an earlier flash estimate. A reading above 50 indicates growth.

An index measuring output, which feeds into the wider composite PMI due on Thursday and seen as a good indicator of growth, eased to 52.2 from August's 27-month high of 53.4, just above the flash estimate of 52.1.

"Today's slight decline should be seen as a sign that the euro zone gradual improvement in activity is not gaining much momentum. That said, the above-50 reading is still consistent with a slight pick up in third quarter GDP," said Annalisa Piazza at Newedge Strategy.

The euro zone emerged from its longest-ever recession in the second quarter and will probably only grow 0.2-0.3 percent per quarter through to the end of next year.

Still, inflation fell to just 1.1 percent in September, its lowest since February 2010, official data showed on Monday, giving the European Central Bank leeway to maintain its loose monetary policy to support the bloc's recovery.

Its Governing Council meets on Wednesday and is expected to leave interest rates on hold at their record low of 0.5 percent but it is likely to hand out more ultra-cheap cash to banks, possibly by year-end, through another long term refinancing operation. (ECB/INT)

The ECB has already injected over a trillion euros through two LTROs, in December 2011 and February of last year, and 42 of 56 economists in a Reuters poll taken last week expect another one as it struggles to keep money market rates low.

(Editing by Jeremy Gaunt)