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Tue, Jun 24, 2008 - Page 10 News List

Europe's manufacturing, service industries shrink

KEY INDEXES The Royal Bank of Scotland Group, the Ifo institute and two national surveys have all reported contractions this month compared with last month


Europe's manufacturing and service industries unexpectedly contracted this month as oil prices surged to a record and the stronger euro hurt exports.

Royal Bank of Scotland Group Plc’s composite index fell to 49.5 from 51.1 last month, a survey by NTC Economics Ltd in London showed. A reading above 50 indicates growth and economists had forecast a reading of 50.7, based on the median of 16 estimates in a Bloomberg News survey.

Business confidence in Germany, the region’s biggest economy, fell more than economists forecast, a separate report said.

Record food and energy prices are boosting inflation and eroding purchasing power for companies and consumers, dimming the outlook for economic growth.

Crude oil prices have doubled in the past year and Air France-KLM Group, Europe’s largest airline, last month posted its first quarterly loss since 2003.

The data “make very worrying reading, showing a toxic cocktail of essentially stagnant economic activity but elevated and still rising inflation,” said Howard Archer, chief European economist at Global Insight in London. “This very much heightens concern about the current state of the eurozone economy and its prospects.”

The manufacturing index declined to 49.1 this month from 50.6 last month and the services index dropped to 49.5 from 50.6, yesterday’s figures show. The composite gauge of input costs jumped to the highest in almost eight years.


Separately, the Munich-based Ifo institute said yesterday that its business climate index declined this month to 101.3, the lowest since January 2006, from 103.5.

The euro fell below US$1.55 and was down 0.6 percent at US$1.5520 as of 9:40am in London.

Volkswagen AG, Europe’s largest automaker, said sales of VW-brand cars declined last month as higher fuel prices discouraged buyers. Aer Lingus Group Plc, Ireland’s second-largest airline, earlier this month said it will break even “at best” as it struggles with soaring fuel costs.

Germany’s manufacturing index slipped to 52.3 this month from 53.6 last month, while the services gauge fell to 53.3 from 53.8, national figures published separately yesterday morning showed. In France, both industries contracted, dropping below the breakeven 50 level.

Adding to pressure on euro-area companies is the euro’s 16 percent increase against the dollar in the past 12 months, which makes exports less competitive outside the currency region.


Heidelberger Druckmaschinen AG, the world’s largest printing press maker, on June 10 forecast a “significant” drop in annual profit, citing slowing demand and the stronger euro.

Soaring commodity prices lifted inflation to 3.7 percent last month, the highest in 16 years. That’s prompted the European Central Bank to indicate it may raise its benchmark interest rate for the first time in a year next month.

ECB executive board member Juergen Stark said last Wednesday that the bank “will do everything necessary” to anchor inflation expectations around the bank’s 2 percent limit.

He also still expects “moderate but ongoing growth,” he said.

Some firms are coping with the economic downturn, helped by expansion in Asia and eastern Europe.

MAN AG, Europe’s third-largest truckmaker, on June 4 stuck with its full-year targets, saying growth in Poland and Russia is offsetting slowing economies elsewhere.

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