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Factory slump and Greek debts bring double dip closer

Weak manufacturing data reported across Europe and far east, while Athens warns it is likely to miss targets on cutting deficit

A dramatic slowdown in manufacturing output across Europe and Greece’s failure to control public spending fuelled fears on Monday that the continent stands on the edge of a double-dip recession that could ripple across to the US and Asia.

European stock markets fell sharply after France and Germany joined Spain and Italy on the sick list of manufacturing nations, undermined by weak demand and a lack of business and consumer confidence. Measures of manufacturing activity in China and the far east also showed a weakness that unnerved investors, sending the FTSE 100 back below the 5,000 mark at one stage and leaving all the major European stock markets in the red.

Markit’s closely watched eurozone-wide manufacturing purchasing managers index (PMI), which gauges changes in the activity of thousands of factories in the countries that share the euro, fell to a final reading of 48.5 in September from 49 in August. A figure below 50 indicates that the sector is contracting.

French manufacturing was especially badly hit, with Spain and Ireland.

A survey of British manufacturers found a decline since the summer had been reversed in September, giving the chancellor, George Osborne, a little autumn cheer. However, with little optimism among businesses, and export orders suffering a significant drop, the sector was unlikely to support growth in the wider economy or create jobs.

The US proved more resilient, with manufacturing orders and employment up, adding to the recent rise in the value of the dollar and US government bonds.

Economists said the gathering storm in the eurozone was the biggest factor weighing on the UK and should give Osborne some pause for thought.

The chancellor, speaking in Manchester at the Conservative party conference, said he recognised the significance of the problem and would be pressing his message for action at a series of EU meetings in the coming weeks. He said: “Britain is not immune to all this instability. Indeed, the resolution of the eurozone debt crisis is the single biggest boost to confidence that could happen to the British economy this autumn.

“They’ve got to get out and fix their roof, even though it’s already pouring with rain,” Osborne said.

Greece warned over the weekend that it would struggle to contain its ballooning debts this year and next, adding pressure on Brussels to agree a package of measures capable of funding Athens – and possibly several other eurozone countries should they be forced to tap bailout funds.

Jonathan Loynes, chief European economist at Capital Economics, said the European Central Bank must share the blame for Europe’s struggling manufacturing sector. He said the ECB had taken up arms against inflation in a “phoney war” when a lack of growth outside a core of strong economies was the key problem.

“There was a view that all the troubles in Greece, Spain and Portugal would not affect the major economies, but that is clearly no longer the case. Now the eurozone is slipping into recession, which means that consensus expectations are way too optimistic,” he said.

The PMI for UK manufacturing rose to 51.1, when it was expected to show a further fall from its August level of 49.4.

Back in January the survey stood at 61.4 and was heralded by government supporters as an indication that the Treasury’s focus on keeping international money markets at bay with severe austerity measures was working. Since the spring, confidence in the UK’s ability to grow has evaporated and manufacturers have joined other parts of the economy in decline.

Many analysts fear the UK’s manufacturing sector shrank over the last three months, hitting tax receipts and raising unemployment, which in turn will make it harder for the Treasury to cut debt.

Samuel Tombs, UK economist at Capital Economics, said: “Output in the industrial sector might have increased a bit – but it still seems likely that the sector remained in recession in the third quarter as a whole.

“There are signs that the improvement in the survey in September will prove to be just a blip. A large part of the increase in output was only achieved by the fastest depletion in the backlog of work for two years.

“The new orders balance only edged up from 48 to 50.5, reflecting the continued weakness of orders from overseas.”

China’s factory activity typically rises in September as businesses prepare for the Golden Week holiday, but this year’s increase was smaller than the average. Yao Wei at Société Générale said: “There was no reason to be cheerful, as this was in fact the weakest September reading ever and was on tie with that in 2008.” © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds