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Eurozone Recession Fears Mount on Manufacturing Drop



An orange sky is seen over the banking district of Frankfurt, Germany, on Tuesday, Feb. 26, 2019.

AP Photo by Michael Probst

LONDON (AP) — Worries are growing that the 19-country eurozone economy is heading toward a recession that could start undoing hard-earned improvements in the labor market.

In a survey of manufacturers that is closely monitored by the European Central Bank in its interest rate deliberations, financial information company IHS Markit found that the sector is contracting for the first time since June 2013.

Its so-called purchasing managers' index — a broad gauge of activity in manufacturing released Friday — fell to 49.3 points in February from 50.5 the previous month. Anything below 50 indicates a contraction in activity.

That's a weak reading at a time of growing uncertainty about the progress of U.S-China trade talks, volatility in financial markets and Britain's impending exit from the European Union. Growth has faded recently in the eurozone — in the final quarter of 2018, the bloc grew only 0.2 percent from the previous three-month period.

The slowdown in manufacturing is a sign that global trade is on the wane amid a tariff war between the U.S. and China. Export-reliant Germany was at the forefront of the survey's decline, with Italy disappointing as well.

"Euro area manufacturing is in its deepest downturn for almost six years, with forward-looking indicators suggesting risks are tilted further to the downside as we move into spring," said Chris Williamson, chief business economist at IHS Markit.

"In addition to widespread trade war worries, often linked to U.S. tariffs, and concerns regarding the outlook for the global economy, companies report that heightened political uncertainty, including Brexit, is hitting demand."

Analysts warned that the hit to manufacturing could soon end a long-running drop in unemployment. Official figures released Friday show that unemployment across the single currency bloc is at its lowest rate since the global financial crisis.

Eurostat said the jobless rate fell to 7.8 percent in January, unchanged from the December rate, which was downwardly revised from the previous 7.9 percent. The rate is the lowest since October 2008.

The agency said 23,000 people left the ranks of the unemployed during the month, taking the total down to 12.85 million.

Separately, Eurostat found that inflation edged higher during February as a result of a slight pick-up in energy costs. Consumer prices rose 1.5 percent from the year before, against 1.4 percent in January.

However, the core rate, which strips out volatile items such as energy, fell, to 1 percent from 1.1 percent.

The fall in the core rate is likely to weigh on policymakers at the European Central Bank ahead of their next meeting Thursday. The bank, which aims for a headline inflation rate of just below 2 percent, is mulling when to start raising interest rates, having brought an end to its bond-buying stimulus. Its main rate stands at zero and many policymakers want to lift borrowing rates back to more normal levels when possible.

"Today's drop in core inflation adds to the ECB's wall of worries of seeing near-term growth and inflation outlooks being weaker than expected, thus delaying monetary policy normalization and even possibly to require additional support," said Daniela Ordonez, lead European economist at Oxford Economics.

 

By AP reporter Pan Pylas

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