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European Manufacturing Shrinks Amid Higher Oil Prices (Update3)

European Manufacturing Shrinks Amid Higher Oil Prices

May 2 (Bloomberg) -- Manufacturing in the dozen euro nations contracted for the first time in almost two years in April, adding to signs that record oil prices are damping economic growth.

An index based on a survey of about 3,000 purchasing managers compiled by NTC Research Ltd. for Reuters Group Plc fell to 49.2 from 50.4 in March, according to figures available on the Internet today. Economists forecast a decline to 49.8, the median of 35 forecasts in a Bloomberg survey showed. The index hadn't dropped below 50, which indicates contraction, since August 2003.

``The extent of the drop was more than I expected,'' said Elwin de Groot, an economist at Fortis Bank Nederland NV in Amsterdam. ``Clearly oil prices are the main culprit for the weakness. The outlook for growth is pretty weak.''

Oil prices above $50 a barrel have raised companies' fuel bills and tempered consumer spending. Business confidence in the euro region fell to a 19-month low last month as companies including Michelin & Cie., the world's largest tiremaker, blamed falling demand for a decline in sales.

The price of a barrel of Brent crude climbed to a record $57.65 a barrel on April 4 and was still 69 percent higher than a year ago at the close on Friday in London. Deutsche Lufthansa AG, Europe's second-biggest airline, announced increases in ticket surcharges to help cover fuel costs.

Job Concern

A sub-index used to gauge new orders fell to 48.9, the lowest since July 2003, from 50.4, today's report showed. The indicator for employment dropped to 47.6 from 48.8. It was the 47th consecutive month that employment in manufacturing contracted.

An 8.9 percent unemployment rate in the euro region is prompting households to rein in spending. L'Oreal SA, the world's largest cosmetics maker, said April 22 that lower demand in Western Europe led to slower-than-expected sales growth in the first quarter.

``The risk is rising that the negative mood in industry will carry over into domestic demand,'' said Andreas Rees, an economist at HVB Group in Munich. ``If the index stays under 50 for five or six months, we'll see a recession in manufacturing.''

Michelin, the maker of Michelin, B.F. Goodrich, Uniroyal and Keber tires, posted lower sales in the first quarter as the company passed on higher energy and raw materials prices. The Dow Jones Euro-Stoxx 50 index lost 1.7 percent in April as the outlook for growth deteriorated.

Global Slowdown

As fuel costs crimp consumer demand, sales abroad, which powered European expansion last year, may not be able to compensate. Global economic growth will slow to 4.3 percent this year from 5.1 percent in 2004, the International Monetary Fund said on April 13. The U.S. economy, the destination for about a fifth of euro-area exports, grew at the weakest pace in two years in the first quarter, the government said April 28.

A 9 percent decline in oil prices since the April 4 record is easing some concern that energy costs will stall economic growth. European stocks rose today, led by carmakers including Volkswagen AG and PSA Peugeot Citroen, as crude-oil futures in New York fell to the lowest in more than two months, or $49.15 a barrel.

``Input prices are coming down,'' Fortis Bank's de Groot said. ``I'm not sure this is the lowest reading we'll see'' in the PMI index, ``but we may be reaching the bottom.''

European 10-year government bond yields held near record lows after the report. The yield on the 3 3/4 percent German bund due January 2015 rose to 3.401 percent at 10:54 a.m. in Frankfurt after hitting a record-low 3.392 percent on Friday. The euro rose 0.2 percent to $1.2865.

`Steady Course'

The gathering signs of weaker expansion in Europe have led politicians such as Italian Prime Minister Silvio Berlusconi and German Economy and Labor Minister Wolfgang Clement to criticize the European Central Bank for failing to stimulate growth with lower interest rates.

``We don't expect that Germany will be an engine of growth for Lanxess in 2005,'' said Matthias Zachert, chief financial officer of German chemical maker Lanxess AG in an interview. ``If the ECB raised interest rates now, that would be rather counterproductive for the economy.''

The ECB has kept its benchmark interest rate at a six-decade low of 2 percent for almost two years to help growth in the region. Policy makers have said cutting rates more isn't an option. Expansion in the euro area has trailed the U.S. for 13 of the past 14 years.

``Monetary conditions are not standing in the way of a recovery,'' ECB council member Axel Weber, who also heads Germany's Bundesbank, said on April 29. ``When you look at our last communique, we confirmed a steady course.''

Economists expect the ECB, which announces its next interest rate decision at 1:45 p.m. in Berlin on May 4, to keep its lending rate unchanged until the first quarter of next year to boost consumer spending and investment, the median of 27 forecasts in a Bloomberg survey showed.

``The ECB will downshift again this week,'' said HVB's Rees. The bank ``has a problem in that activity is weakening. We don't expect a rate move this year.''


To contact the reporter on this story:
Brian Swint in Frankfurt at [e-mail].


LINK: http://www.bloomberg.com/apps/news?pid=10000087&sid=aQXlPIU2nJ6g&refer=top_world_news