Eurozone: New Currency, Old Economic Agony

02 January 2002

January 1 saw the advent of the Euro, the new currency common to twelve of the European Union’s fifteen member states: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, The Netherlands, Portugal and Spain. Still teetering on the sidelines are Sweden, Denmark and the UK.

Of the nations to have adopted the Euro, eight (Austria, France, Germany, Greece, Ireland, Italy, the Netherlands and Spain) together account for an estimated 92% of Eurozone manufacturing activity and are monitored monthly by the Reuters Eurozone Manufacturing Purchasing Managers’ Index.

Designed to provide an overall view of manufacturing conditions within the Eurozone, the PMI is based on data collected from purchasing executives in some 2,500 participating companies. It is widely accepted as the earliest reliable indicator of Eurozone manufacturing activity.

Key points from December’s data are ...

* Manufacturing
The Eurozone manufacturing economy again contracted at a significant rate through the month – albeit registering a slowdown in the rate of decline. The PMI recorded 44.1 in December, up again from October’s series low, but still significantly below the critical 50.0 no change mark.

* Underlying trend
Although the PMI has risen over the past two months, the level of contraction signalled through the final quarter of 2001 is still considerably deeper than that seen in Q3 and Q2. At a national level, PMI readings for all component countries except Germany posted improvements in their levels

* Order books
In response to shrinking order books, Eurozone manufacturers again cut production levels in December. However, also in line with new orders, overall output contracted at a slower rate for the second month running.

Only Germany and Austria saw an increase in the rate of decline of output during the month, while only Greece saw a net rise in total production.

* New orders
Leading the contraction in manufacturing business activity in December was the falling level of incoming new orders received by participating firms. Total demand for manufactured goods fell for the ninth consecutive month, although the rate of decline eased for the second successive month from October’s four-and-a-half year survey high. The majority of panellists continued to link falling demand to poor global economic conditions.

With overall orders still declining, panel firms continued in their attempts to streamline production by shedding labour for the seventh straight month. Moreover, at a level of 44.5, up only marginally from 44.2 in November, the Eurozone Employment Index indicated that the rate of job shedding was largely unchanged from the previous month’s record rate.

* Raw materials
Falling demand for raw materials as a result of contracting output and new orders enabled suppliers to improve their delivery times for the ninth month in a row, albeit at a marginally slower rate than in November. Weaker demand for raw materials, together with the lower prices of oil related products, also contributed to a decline in the average price of inputs for the sixth successive month. The rate of input price deflation eased slightly from that seen one month ago, but remained significant.

* Purchases
The Eurozone Stocks of Purchases Index registered 42.4 in December to signal another significant decrease in manufacturers’ inventories of raw materials. In fact, the rate at which panel firms reduced stocks of purchases picked up to hit a new survey record rate. A significant number of respondents reported that they had deliberately run down stocks of raw materials during the month in order to cut costs and limit their exposure to the global economic slowdown.

The Reuters Eurozone PMI is compiled by NTC Research and sponsored by Reuters.

News source: NTC Research