World Economy

Factories Price Cuts Toughen ECB Deflation Battle

Factories Price Cuts Toughen ECB Deflation BattleFactories Price Cuts Toughen ECB Deflation Battle

Euro-area factories cut prices in September by the most in more than a year and German manufacturing shrank, underlining the mounting challenge facing Mario Draghi.

Companies are trying to compensate weak demand by charging less. Output prices in the region fell for the first time in five months, according to the report, adding oil to the fire for investors betting on a worsening inflation outlook, Bloomberg reported.

The European Central Bank president is on a mission to avert deflation as the euro region’s economic landscape deteriorates. Purchasing Managers’ Indexes from Markit Economics showed manufacturing also contracted in France, Austria and Greece, with a gauge for the 18-nation region pointing to near-stagnation. A separate report showed spillover to the UK, with factory growth there at a 17-month low.

As the euro area’s economic weakness spreads to countries in the region’s core, the ECB will face increased scrutiny tomorrow when it unveils details of an asset-purchase plan. The fresh round of stimulus comes against a backdrop of weak inflation and stuttering growth, with geopolitical uncertainty and high unemployment weighing on confidence and demand.

“It is very hard to put any positive spin” on the data, said Howard Archer, chief European economist at IHS Global Insight in London. “Clutching at straws, the best that can be said is that it indicates that the manufacturing sector is still growing.”

Euro-area manufacturing expanded at the slowest pace in 14 months, according to today’s report. The gauge stood at 50.3 in September, just above the 50 mark that divides expansion from contraction, and below a preliminary estimate of 50.5.

 German Slump

A manufacturing gauge for Germany, once Europe’s export-led powerhouse economy, slid to 49.9, the lowest in 15 months, with new orders falling at the fastest pace since 2012. By contrast, factory activity in Italy returned to growth, with expansions also registered in Spain, the Netherlands and Ireland.

In the euro area, new orders fell for the first time since June 2013 due to weak domestic demand and waning exports, Markit said, casting doubt on forecasts that the industry will pick up toward the end of the year.

The euro slid after the German report and was down 0.2 percent at $1.2604 as of 11:18 a.m. Frankfurt time. It fell to a two-year low of $1.2571 yesterday.

It makes for “gloomy reading,” Chris Williamson, chief economist at Markit in London, said of the PMI report. Markit’s manufacturing gauge for the UK fell to 51.6 in September, the lowest since April 2013, from 52.2 in August. A measure of export orders also dropped and Markit blamed the weakness on the “on-going lethargy of the euro zone.”

In the euro area, the ECB last month predicted economic growth of 0.9 percent this year, followed by expansions of 1.6 percent and 1.9 percent in 2015 and 2016, respectively.