Euro Zone Manufacturing Slumps Amid Falling Demand

Manufacturing activity in the euro zone experienced its steepest decline this year in September as demand decreased, despite price cuts. Germany's factory conditions worsened notably. The Purchasing Managers' Index dropped significantly, indicating contraction. Economic output is expected to fall further, while inflation likely fell below the European Central Bank's target.

Manufacturing activity across the euro zone declined at its fastest pace this year in September as demand waned sharply despite factories cutting their prices, a survey showed on Tuesday. The downturn was broad-based and Germany, Europe's largest economy, recorded its most pronounced worsening of factory conditions in 12 months.

HCOB's final euro zone manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, dropped to 45.0 in September, slightly ahead of the 44.8 preliminary estimate but further from the 50 mark that separates growth from contraction. An index measuring output fell to a nine-month low of 44.9 from 45.8 in August, ahead of the 44.5 flash estimate.

"Euro zone industrial production will likely drop by around 1% in the third quarter compared to the last one. With incoming orders plummeting fast, we can expect another dip in production by year-end," said Cyrus de la Rubia at Hamburg Commercial Bank. Demand fell at its fastest rate this year even as factories returned to cutting prices. The output prices index sank to 49.2 from 51.1.

Inflation likely fell to 1.8% last month, below the European Central Bank's 2.0% target. The ECB has cut interest rates twice this year and plans another cut in December, according to a Reuters poll. "The ECB will be pleased to see that purchase prices fell in September, especially after three months of rising prices. The drop in oil and natural gas prices helped bring down input costs, and companies passed some of that savings on to their customers," de la Rubia said.

"But let's not get too comfortable – these price declines might not last. With the situation in the Middle East heating up, there's always the chance that energy prices could spike again."

(With inputs from agencies.)