Euro zone factory activity slips further

The index,which gauges changes in the activity of thousands of factories in the euro zone,fell to a final reading of 48.5 in September from 49.0 in August. It was revised up slightly from a preliminary reading of 48.4.

That represents the second consecutive month the manufacturing PMI has fallen below the 50 mark that divides contraction from growth,with new orders plunging at a rate not seen since June two years ago.

Surveys released earlier on Monday showed factories in Spain,an economy sagging under the weight of harsh austerity measures like much of the euro zone periphery,deteriorating at the fastest pace in more than two years.

French manufacturers,meanwhile,saw activity decline for the second month in a row. Even in Germany,the biggest and arguably the most prosperous economy in the 17-nation bloc,manufacturing growth effectively came to a standstill.

Manufacturers are reporting the worst business conditions for over two years,facing a combination of lacklustre domestic demand and falling export sales,said Chris Williamson,chief economist at PMI compiler Markit.

The PMI8217;s output index,which feeds directly into the composite euro zone PMI that represents the bloc8217;s private sector at large,recovered slightly to 49.6 from 48.9 in August,although it still suggested contraction.

There was no good news in the new orders index either,which suggested the euro zone8217;s manufacturing malaise will continue after dropping to 45.2 in September from 46.0 the previous month 8212; the worst showing since June 2009.

Disappointing sales and growing uncertainty about the economic outlook prompted increasing numbers of manufacturers to focus on cost cutting,leading to only a modest overall increase in employment during the month,said Williamson.

Euro zone unemployment held steady at 10 per cent in August,although that figure hardly reflects the disparities between fairly restrained joblessness in Germany and France,and the far larger proportion of citizens on dole queues in Spain and Greece.

Monday8217;s PMI suggested only very modest jobs growth taking place in euro zone factories.

The input and output price indexes were rare bright spots in the survey,which implied easing price pressures for manufacturing despite inflation hitting a surprisingly strong 3.0 per cent in September.

Both input costs and producers8217; selling prices rose only very modestly in September 8230; as weak demand prompted increasing numbers of manufacturers and their suppliers to offer discounts,said Williamson.

Mounting evidence of a weakening euro area economy prompted some economists to predict an interest rate cut on Thursday from the European Central Bank,although most expect it to wait until the new year before easing policy.

The ISM Manufacturing index,which measures factory activity in the United States,is expected to fall marginally to 50.3 in September from 50.6 in August 8212; only barely above the 50 watermark for growth.