November 4, 2019 / 9:13 AM / a month ago

Euro zone factories stuck in a slump as trade war still biting

LONDON (Reuters) - Factory activity across the euro zone contracted sharply last month as demand was again stifled by the U.S. trade war with China and the persistent lack of clarity over Britain’s departure from the European Union, a survey showed.

FILE PHOTO: A worker is seen at Plasti-Tremp factory, a family-run business specialized in plastic process, in Menetou-Ratel, France, October 3, 2019. REUTERS/Charles Platiau/Files

Worryingly for policymakers at the European Central Bank, who have restarted a 2.6 trillion euro (£2.3 trillion) bond-buying programme after cutting interest rates on deposits in September, the malaise appears to be spread across the region.

New ECB President Christine Lagarde will have to heal a rift between representatives of cash-rich countries such as Germany, the Netherlands and France, who opposed the decision to resume bond purchases, and the struggling periphery.

But those struggles appear widespread and manufacturing activity in Germany, Europe’s largest economy, remained stuck in recession last month as new orders fell for the 13th month running and factories slashed jobs at the fastest pace in almost 10 years.

Italian manufacturing activity declined for the 13th month running while in Spain it contracted for a fifth month as political turmoil at home and abroad took their toll.

However, the other of the bloc’s four biggest economies, France, bucked the trend and factory growth increased modestly, likely supported by billions of euros of stimulus from the government.

IHS Markit’s final manufacturing Purchasing Managers’ Index (PMI) for the euro zone was 45.9, barely above September’s seven-year low reading of 45.7 and its ninth month below the 50 mark separating growth from contraction.

“It was better than anticipated but it was still heavily in negative territory. It basically is telling us that the euro zone manufacturing sector is in recession,” said Peter Dixon at Commerzbank.

“To a large extent, it is because the euro zone is being hammered by the U.S.-China trade dispute which is hampering world trade.”

An index measuring output, which feeds into a composite PMI due on Wednesday that is seen as a good barometer of economic health, rose to 46.6 from September’s near seven-year low of 46.1.

New orders across the euro zone also fell, with the related index spending its 13th straight month below the breakeven mark, although it did rise to 45.3 from 43.4, IHS Markit said.

U.S. President Donald Trump on Friday suggested he could sign a long-awaited trade agreement with China that negotiations about a “phase one” agreement were going well. But last month he also began slapping tariffs on EU imports such as French wine and Spanish olives.

Meanwhile, Britain had been due to leave the European Union on Oct. 31 but has now had that delayed for the third time this year after Prime Minister Boris Johnson failed to get an exit deal through parliament in time.

Other forward-looking indicators in the survey suggest there won’t be any turnaround soon in the euro zone, despite factories cutting their prices for a fourth month in October.

Still, morale among investors in the bloc jumped in November to its highest level since June on signs of an economic upswing in Asia and resilience in the U.S. economy, another survey showed on Monday.

Editing by Hugh Lawson

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