By Daniel Hunter

The downturn in the Eurozone manufacturing sector gathered momentum at the start of the third quarter. The rates of contraction in output, new orders and employment all accelerated during July.

The final Markit Eurozone Manufacturing PMI fell to a 37-month low of 44.0, down from 45.1 in June and below the earlier flash estimate of 44.1. The PMI has now signalled contraction for 12 consecutive months. Widespread weakness was seen across the currency region, with almost all of the national PMIs at sub-50.0 levels. Only Ireland bucked the trend, seeing improved business conditions as its PMI hit a 15-month high.

Rates of manufacturing decline in Germany, France and Spain were either at or close to the steepest since mid-2009. Italy recorded the worst overall performance in three months, while Austria slipped back into contraction and business conditions in the Netherlands continued to deteriorate. Greece stayed rooted to the bottom of the PMI league table.

Input prices fell at a stronger rate during July. Manufacturers’ purchasing costs declined to the greatest extent in almost three years, reflecting lower commodity and raw material costs. All of the nations covered by the survey posted a decrease except for Greece.

Manufacturers cut their average selling prices for the second month running. The rate of decline was modest, but nonetheless the fastest since February 2010. France was the only nation to report higher charges, though even there the increase was only slight.

“The Eurozone manufacturing sector’s woes intensified again in July. Output fell at the fastest rate since mid-2009, consistent with the official measure of production falling at a quarterly rate in excess of 1%. Manufacturing therefore looks to be on course to act as a major drag on economic growth in the third quarter, as the Eurozone faces a deepening slide back into recession," Chris Williamson, Chief Economist at Markit said.

“The July survey is characterised by faster rates of decline in output and new orders, leading manufacturers to cut back on headcounts and inventory holdings and suggesting a fear among companies towards ongoing weakness in the coming months.

“Rates of decline hit the fastest for three years or more in Germany and France, but Spain and Greece continue to stand out in seeing particularly disappointing performances.

“The only country to show any sign of emerging from the downturn so far this year is Ireland, where output is beginning to increase again due to rising exports. The brighter picture from Ireland perhaps sends a message that other countries do not necessarily face the inevitability of deepening downturns if competitiveness can be improved, though the current weakness of global economic growth suggests that all producers face a challenging environment in export markets as well as at home.”

The main factor underlying lower selling prices was the ongoing weakness of demand, as Eurozone manufacturers reported weaker inflows of new business from both domestic and export clients.

Total new orders contracted for the fourteenth straight month in July, with the rate of decline the third-fastest for over three years. Greece and Spain recorded the steepest falls, while the big-three of Germany, France and Italy all posted sharp contractions. Declines in the Netherlands and Austria were much weaker in comparison, while Ireland saw new order growth hit a 15-month high.

New export orders fell at the fastest pace for eight months, with intra-Eurozone trade particularly subdued. Only Ireland and the Netherlands reported increases in new exports. The German export machine remained firmly in reverse during July, recording the steepest drop in new orders of all countries and the fastest rate of decline since May 2009.

Eurozone manufacturing output fell at the strongest rate since May 2009. By country, the strongest declines were registered in Greece, Spain and Germany respectively.

Weak demand also resulted in a further shift towards cost caution at euro area manufacturers, leading to job cuts and lower levels of both purchasing and inventories.

Job losses were reported for the sixth month running in July. The rate of reduction reached a two-and-a-half year record, and was sharper than the earlier flash estimate. Evidence of spare capacity remained, however, as backlogs of work fell to the greatest degree since June 2009.

Job cuts were the most severe for at least two-and- a-half years in Germany, France, Italy and Spain. Severe cuts were also implemented in Greece, while job shedding was only modest in Austria and the Netherlands.

The cut in purchasing volumes was the second- steepest since mid-2009, with marked reductions signalled in all nations bar Ireland (which reported a solid increase). Reduced demand for raw materials eased the pressure on suppliers, leading to an improvement in lead-times for the fourth month running.

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