By Daniel Hunter

At 46.1 in September, the headline seasonally adjusted Markit Final Eurozone Manufacturing PMI posted below the neutral 50.0 mark for the fourteenth successive month.

Although the PMI rose to a six-month peak — up from 45.1 in August and above the earlier flash estimate of 46.0 — its average over Q3 2012 as a whole was only 45.1. This was below the prior quarter’s 45.4 and the weakest outcome since Q2 2009.

Ireland was the only nation to report stronger growth in September, although the Netherlands did edge back into expansion territory. Downturns continued elsewhere, although there were positive movements in the German, Italian and Spanish PMIs to bring them all to six-month highs. Austria continued to move down the PMI league table, with its headline index hitting a 39-month low.

The real cause for concern was a sharp acceleration in the rate of contraction in France that left its PMI, at 42.7, only slightly above that for Greece. Moreover, the month-on-month decline in the level of the French PMI was among the steepest in its history, following similarly sharp accelerations in the rates of contraction for both production and new orders.

Eurozone manufacturing production declined for the seventh month running in September. Although the rate of contraction eased to a five-month low, this mainly reflected companies making substantial inroads into backlogs of pipeline work. In contrast, the trend in new orders remained lacklustre, with inflows of new work declining for the sixteenth straight month. Output and new orders declined across the big-four nations, Austria and Greece.

Eurozone manufacturers reported weaker demand from domestic markets and reductions in both intra- Eurozone and global trade flows. New export orders fell for the fifteenth month in a row. Almost all of the nations covered by the survey reported a drop in new export work, with the steepest declines signalled for Greece, Austria and Germany.

With the manufacturing sector still in contraction during September, job losses mounted and a reduction in employment was signalled for the eighth month in a row. However, the rate of decline eased to its weakest since March and was less sharp than signalled by the earlier flash estimate.

Ireland reported solid job creation, while workforce number rose slightly (following recent declines) in both Germany and the Netherlands. Rates of job losses accelerated in France, Spain, Austria and Greece, but eased in Italy.
Apart from weak demand, lower payroll numbers reflected the presence of spare capacity at manufacturers.

This was further highlighted by a sharp decrease in levels of work-in-hand during September. Supplier lead times also shortened for the sixth month running, a sign of available spare capacity on the supply-side of the economy.

“Despite seeing some easing in the rate of decline last month, manufacturers across the euro area suffered the worst quarter for three years in the three months to September," Chris Williamson, Chief Economist at Markit said.

"Output, order books and exports all continued to fall at steep rates in September, causing firms to cut their staffing levels once again.

“The survey is consistent with manufacturing output falling at a quarterly rate of perhaps as much as 1.0%, which means the sector will act as a severe drag on economic growth. While official data have not yet signalled the renewed weakness, other business surveys have begun to follow the PMI’s downward trend. It therefore seems inevitable that the region will have fallen back into a new recession in the third quarter.

“There were some encouraging signs that the bottom may have been reached, however, with the rate of decline easing to a six-month low. Germany, Italy and Spain all saw the weakest downturns since February, while the Netherlands saw the largest expansion for just over a year. France is perhaps the new worry, with its PMI slumping to the lowest for three-and-a-half years.

“Input costs also jumped higher, largely reflecting high oil and agricultural commodity prices. While rising costs are a worry for both inflation and profits, the rate of input price inflation remains far weaker than earlier in the year, and the recent drop in oil prices should also help bring pressure off costs and prices, suggesting that policymakers will remain more concerned about the slide back into recession rather than inflation.”

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