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European May Manufacturing Shrinks Most in 22 Months (Update4)

European May Manufacturing Shrinks Most in 22 Months

June 1 (Bloomberg) -- Manufacturing in the dozen euro nations in May shrank the most in almost two years as unemployment near a five-year high and oil prices around $50 a barrel add to concerns about the outlook for expansion this year.

An index released today based on a survey of about 3,000 purchasing managers compiled by NTC Research Ltd. for Reuters Group Plc fell to 48.7, the lowest since July 2003, from 49.2 in April. Economists had expected a reading of 49.0, according to the median of 30 estimates in a Bloomberg survey.

The economic prospects for the euro region are deteriorating as higher energy prices drive up costs and companies including Electrolux AB, the world's largest maker of household appliances, cut jobs. The European Central Bank cut its forecast for growth this year in the 12-nation euro economy to 1.4 percent amid a slump in consumer and business confidence, a person familiar with the matter said today.

``The current economic crisis will drag on and this is resulting in a severe drop in demand,'' said Giulio Cicognani, chief executive officer of Negri Bossi SpA, an Italian maker of hydraulic and control systems for cars. ``We can't see what will break the vicious circle.''

Euro Declines

The euro fell against the dollar after the manufacturing report. The European single currency traded at $1.2255 at 11:40 a.m. in Frankfurt, down from $1.2304 late yesterday in New York, according to electronic foreign-exchange dealing system EBS.

A NTC Research sub-index used to gauge new orders at factories in the euro region fell to 48.5, the lowest since June 2003, from 48.9, today's report showed. The indicator for employment dropped to 47.5 from 47.6. It was the 48th consecutive month that employment in manufacturing contracted.

``The problems facing Europe's manufacturers are not abating; oil prices have taken their toll and companies are reacting,'' said Luigi Speranza, an economist at BNP Paribas SA in London. ``There is a lack of domestic demand and exports haven't resuscitated enough to offset that.''

The European Central Bank will announce that it trimmed its 2005 growth forecast for the euro region to about 1.4 percent from 1.6 percent when policy makers meet on June 2 in Frankfurt, according to a personal familiar with the matter. Separately, the European Commission cut today its second-quarter growth forecast to about 0.3 percent, paring a May 12 prediction of 0.4 percent.

The euro region's economy expanded 0.5 percent in the first quarter from the previous three months, lagging the comparable 0.9 percent growth rate in the U.S. and 1.3 percent in Japan.

Oil Prices

ECB President Jean-Claude Trichet said May 30 oil prices have led to ``increasing uncertainty over economic prospects.'' Bank of Italy Governor Antonio Fazio, who also sits on the ECB's 18-member governing council, said yesterday Europe's fourth- biggest economy is in an ``acute phase of difficulty'' after it slipped into recession for the second time in as many years.

The price of crude climbed 38 percent in the past year, touching a record of $57.65 a barrel in London on April 4. Germany's VCI chemical industry group, which includes companies such as Leverkusen-based company Bayer AG, said May 24 oil prices may limit sales growth. Cologne, Germany-based Deutsche Lufthansa AG last month announced plans to raise fuel surcharges to cope with higher energy costs.

Job Cuts

Faced with shrinking profit margins, more companies are resorting to job cuts. Electrolux plans to eliminate about 1,100 jobs in Europe, transferring production to countries with lower wages. Grohe Holding GmbH, a German maker of faucets, said May 23 it could cut 1,500 jobs and shift production to China.

With a euro-region unemployment rate of 8.9 percent, consumers are keeping a rein on spending. Surteco AG, a supplier of plastic coatings for furniture, blamed ``an exceptionally weak domestic economy'' for a 14 percent drop in first-quarter earnings. ProSiebenSat.1 Media AG, Germany's largest broadcaster, said May 13 that consumers ``remain wary'' and expects the country's advertising market to decline about 2 percent this year.

European households were the most pessimistic in a year last month and business confidence dropped to a 21-month low, surveys by the European Commission showed yesterday. In France, consumer optimism this month plunged to the lowest since 2003 after unemployment in April held at its lowest since 1999, separate government reports showed yesterday. German retail sales in fell 3 percent in April from a year earlier as unemployment held near a post-World War II high, a government report showed today.

French Vote

``The signals arriving all point in the same direction and that is that there is a deterioration in consumer spending and a fall in confidence for consumers and business,'' said Lucia Lorenzoni, an economist for MPS Finance BM in Siena, Italy. ``That's made worse by the labor market stalling.''

Confidence in the euro economy was dealt a further blow after French voters rejected the European Union constitution in a referendum on May 29. The euro is heading for the biggest monthly loss in four as opinion polls show Dutch voters are likely to do the same today.

The euro's 8 percent drop this year against the dollar may give a boost to exporters such as Italy's Ducati Motor Holding SpA by making their goods cheaper in regions that use the U.S. currency. The U.S. economy is the destination for about a fifth of euro-area exports.

The reluctance of households to spend makes it difficult for companies to pass on more expensive raw materials to consumers, forcing many to lower their sales goals instead. Berthold Hermle AG, a German maker of drilling machines, said on May 24 it would be struggle to reach its 2005 targets.

To contact the reporter on this story:
Flavia Krause-Jackson in Rome at [e-mail].


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