July 1, 2008 10:40 am

Eurozone manufacturing slows in June

Manufacturing businesses in the eurozone produced less in June than the month before, the first time in three years manufacturing activity has contracted in the 15-nation currency bloc and a sure sign that economic growth is slowing.

The RBS/Markit eurozone purchasing managers’ index fell to 49.2 in June from 50.6 seen in May, a decline that saw the indicator cross the 50-point-mark above which output is growing. An earlier June flash-estimate had forecast 49.1.

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IN Brussels

With eurozone economic growth long expected to slow, economists said the trend would not deter the European Central Bank from raising rates by an expected quarter point to 4.25 per cent on Thursday. But it could pre-empt more rises.

Gilles Moec at Bank of America in London said PMI was unlikely to deter the ECB from a move on July 3. But should output continue to fall and joblessness in some EU countries rise, “stable interest rates at 4.25 per cent” would follow.

Underscoring the worsening economic picture, the index showed new orders and work-backlog contracted for the third month. Output declines in Spain and Ireland were particularly large, although German manufacturing continued to grow.

Worries an increase in the ECB’s main rate may coincide with a marked slowing in eurozone growth has animated a chorus of European politicians to caution the region’s monetary-policymakers againt an overzealous fight against inflation.

But the PMI index indicated that price-rises – driven mainly by record-high energy prices – are affecting manufacturers as well. Input prices surged the most for almost two years, forcing businesses to raise output prices more than in May.

“We are getting a mix of stagnating growth and increasing pass-through pressures,” said Mark Wall at Deutsche Bank in London. This “worrying” combination was “a dilemma for the ECB”, though he reckoned it was still likely to raise its main rate on Thursday.

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