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Unlucky for Some – Thirteenth Month of Euro-Zone Contraction

It seems that when it comes to the ripple effect of the euro-zone crisis no country is immune. The downturn may have begun in minor members of the currency bloc, but now, despite all their ducking and diving, euro-zone heavyweights Germany and France have been dealt a body blow.

The latest data has revealed that in August euro-zone manufacturing contracted more than initially forecast, despite factories slashing product prices. Some have cited weakness in the area’s core countries as the cause and commented that it makes recession for the area in the third quarter an increasingly likely possibility. Data released on Friday also revealed that inflation jumped higher than predicted on August – a factor which may well put-off the European Central Bank action expected this week.

Markit Economics today revised their original flash Purchasing Managers’ Index reading for the manufacturing sector of 45.3, lowering it to 45.1. Although this is still significantly higher than the three-year-low of 44.0 recorded in July it marks the thirteenth consecutive month below the 50.0 growth level.

In spite of also being higher than July’s figure of 48.3, the flash reading for the output prices index was also negatively revised, falling from 48.9 to 48.6. The survey also showed that input costs paid by factories declined for a third month, and that the manufacturing output index came in at 44.4, 0.2 lower than the flash reading.

June’s record high bloc-wide unemployment level of 11.3 per cent has remained the same through July, but this situation could soon worsen. Floundering French car manufacturer PSA Peugeot Citroen has already announced it will be dropping 10,000 members of staff in the coming months whilst German-run Opel (a subset of General Motors Co’s) announced that in two of its plants it would be reducing the hours of thousands of employees.

After already contracting 0.2 per cent in the three months leading up to June no growth is now expected for the 17-nation economy until the beginning of next year. ECB forecasts are even predicting a 0.1 per cent contraction for the euro-zone.

A senior economist with Markit attributed persistent contraction to a lack of action on the part of the euro-zone’s largest economies Germany and France. Rob Dobson stated: ‘Larger nations like France and Germany remain in reverse gear […] The euro-zone manufacturing sector remains firmly in contraction territory. The rate of decline was a little slower than in July, providing some heart that the manufacturing downturn may be easing but the sector is on course to act as a drag on gross domestic product in the third quarter.’

Although the decline was not as steep as previously, activity in German and French factories still fell for the sixth month in a row.

Dobson then added: ‘The uncertainty and cost-caution resulting from the currency union’s ongoing political and debt crises are now being reinforced by softer global economic growth. The euro-zone product and labour markets are unlikely to show any real sustained improvement until regional structural issues are addressed and the broader global backdrop brightens […]The national picture remains one of widespread contraction, only Ireland saw manufacturing output rise. The situation in Italy is also becoming more of a cause for concern, as it falls further down the PMI league table.’

The circumstances of Italy and Spain (the euro-zone’s third and fourth largest economies) remain critical but there has been no concrete answer to the question of how they will escape their spiralling debts.

The latest ECB manoeuvre in the debt crisis war is a widespread slashing of interest rates to 0.5 percent – a new record low. This is generally expected to occur either towards the end of this week or in October.