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Wednesday, 2 May, 2001, 10:28 GMT 11:28 UK
Eurozone manufacturing gloom
Tunnel construction workers in France
The manufacturing mood has turned gloomier
Manufacturing in the eurozone appears to be shrinking for the first time in more than two years.

The eurozone Purchasing Managers' Index, which is seen as a leading indicator on the state of the economy, tumbled into negative territory in April.

The fall reflects bad news from the eurozone's major economies, Germany, France and Italy.

A drop in the volume of new orders received by manufacturers dragged the index down, while slower growth in employment also had an impact.

The eurozone PMI, surveying more than 2,000 manufacturing companies across Europe, has fallen from 51.2 in March to 49.3.

Any figure over 50 suggests growth in manufacturing, while any below indicates a contraction.

"It's pretty clear now that the eurozone manufacturing sector at least is following the US lower," said Steven Pearson at the Halifax bank in London.

Calls for a rate cut

The signs of shrinkage in manufacturing will bolster critics of the European Central Bank, which is under pressure to cut interest rates.

European Central Bank
The ECB is under pressure to cut rates
"It's a clarion call to the ECB to cut rates and sooner rather than later," said David Brown at Bear Stearns in London.

"The writing is on the wall here that the eurozone economy is feeling the pain and strain, and the ECB is fiddling whilst growth goes up in smoke."

Last week the International Monetary Fund (IMF) joined the US government in urging the ECB to lower rates to counter the effects of a slowdown in the US.

So far the ECB has held firm, with rates pegged at 4.75%, because inflation in the eurozone is well over the Bank's target of 2%.

On Monday, the independent Centre for Economics and Business Research (CEBR) said growth in the eurozone would be slower than predicted both this year and next.

Previous falls

Until now the eurozone PMI has only slipped below 50 for one period in its four-year history, during October 1998 and February 1999.

This coincided with the Asian economic crisis and the near collapse of a major hedge fund in the US, which could have dragged several US banks down with it.

A year ago, the index hit a record level of 60.7.

The eurozone PMI is based on five subsidiary indexes that measure a range of factors, such as new orders, employment and the cost of raw materials.

New orders on the decline

The subsidiary eurozone New Orders Index, which signals trends in the economy over the coming months, offered little signs of optimism.

It dipped to 47.8, its lowest level since December 1998.

"The new orders are a matter of concern as they are forward-looking," said Rainer Guntermann, at Dresdner Kleinwort Wasserstein in Frankfurt.

"It looks like GDP growth in the second quarter is going to be very sluggish."

The employment index showed that workforces continued to expand in April, albeit slightly.

The US equivalent of the eurozone PMI, the National Association of Purchasing Management survey, fell under 50 last August. The April index, released on Tuesday, was at 43.2.


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See also:

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