Reuters

(Reuters)

Euro Zone Factory Activity Falls; Periphery Pain Intense

Politics Reuters

The euro zone's manufacturing sector contracted for the seventh straight month in February, with factories in the bloc's struggling indebted states facing some of the toughest conditions on record, a business survey showed on Thursday.

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It looks increasingly possible that the 17-member euro zone is stuck in a mild recession, as new orders continued to fall and backlogs of work dry up, even in the region's most healthy economy Germany.

Markit's Eurozone Manufacturing Purchasing Managers' Index (PMI) rose to 49.0 last month from January's 48.8, in line with a flash reading but has now been below the 50 mark that divides growth from contraction since July.

"Whether the euro zone will sink back into recession in the first quarter remains highly uncertain. The periphery remains the major concern," said Chris Williamson, chief economist at data provider Markit.

The data comes a day after the European Central Bank's latest half-trillion euro cash injection into the euro zone's banks.

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The funds have helped stabilize sovereign bond markets in countries such as Italy and Spain but accompanying austerity programs appear to have delivered a further blow to growth.

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Manufacturing activity in near-bankrupt Greece shrank at the fastest pace in at least thirteen years as the country gears up for a fresh wave of cuts in return for much-needed bailout cash.

In Spain, where the government is also struggling to slash its public deficit, factories shed jobs at the fastest rate in more than two years, worsening employment prospects in a country where already more than one-in-five is out of work.

JOBS UNDER PRESSURE

A Reuters poll taken last month suggested the euro zone as a whole will probably wallow in a relatively mild recession until the second half of this year and the survey data showed the manufacturing sector will not be its savior.

Factories cut jobs at the fastest rate in nearly two years and new orders continued to decline, while the output sub-index dipped to 50.3 from a flash and January reading of 50.4.

"New orders continued to fall, meaning companies generally remain reluctant to expand capacity and take on new workers, often preferring instead to cut costs and prepare for tough times ahead," Williamson said.

Declining orders meant factories ate into backlogs of old work for the ninth month in a row.

The European Commission expects the euro zone's economic output to shrink 0.3% in 2012, the second recession in just three years for the common currency area.

Earlier data from Germany, which has proven more resilient to the euro zone crisis than some of its peers and is Europe's largest economy, showed the manufacturing sector barely grew last month as new orders fell for the eighth month.

There was no growth in neighboring France whose PMI came in at 50.0, while Italy's sector contracted for the seventh month in a row.

PMIs from other periphery countries such as Greece, where the index fell to an all-time low, showed a continued decline as governments are being forced to adopt tough austerity measures which in themselves hurt output, provoking calls from some quarters for a new growth strategy for the region.

The ECB cut its main refinancing rate to a record low of 1.0% in December and is seen cutting it further to 0.75% next quarter in a further attempt to stimulate growth.

The central bank aims to keep inflation just below 2% and while official data on Wednesday showed prices rose 2.6% in January the PMI data showed that despite soaring input costs firms only marginally increased prices charged last month.

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