European manufacturing sector slumps

Factories in the eurozone suffered sharp falls in business last month as the sovereign debt crisis affected orders, according to a report which has fanned fears that the region is slipping back into recession. Activity among eurozone manufacturers fell for the third month running and at its fastest pace for more than two years. With new orders also down at the sharpest rate in more than two years, economists widely expect the gloom to continue, against a backdrop of uncertainty surrounding Greece's bailout and the fates of other struggling economies such as Italy. The headline activity reading on the Markit eurozone manufacturing purchasing managers' index (PMI) fell to 47.1 in October from 48.5 in September. It was lower than an initial estimate last month for it to come in at 47.3 and below 50, the point that separates growth from contraction. The manufacturing survey of thousands of factories around the region was taken as a worrying sign for the wider economy. "The latest manufacturing PMI further emphasises the marked reversal of fortunes for a sector that was the leading light of the economic recovery," said Rob Dobson, senior economist at Markit. Within the eurozone, Italy's manufacturing decline stood out. Its output reading suffered the biggest monthly drop in the survey's history. "If there was any doubt that the eurozone was headed for recession, these data should confirm it," said Alan Clarke, eurozone economist at Scotia Capital. "At these levels the composite PMI is screaming out [for] interest rate cuts from the European Central Bank. It is just a case of when, not if." The ECB announces its latest policy decisions on Thursday but only a handful of economists think it will cut rates. In a Reuters poll of 70 economists, 11 said the ECB would cut to 1.25% from 1.5% at this meeting. Around two-thirds predicted a cut by December. Economists said the PMI compounded worries in financial markets sparked by Greek prime minister George Papandreou's decision to hold a referendum on the euro bailout . "Looking ahead, the biggest risk is that what until now has been a classic uncertainty shock morphs into a more protracted credit crunch," said James Nixon at Société Générale. "The optimism stemming from last week's euro summit has now clearly dissipated and as a result, financial conditions are unlikely to improve in the fourth quarter. This increases the risk of a more protracted slowdown than we have hitherto envisaged." Economists are also warning that the UK could slip back into negative territory before the end of the year as businesses battle uncertainty and consumers strain under spending cuts and rising unemployment. But there was some more positive news in the UK on Wednesday, with a survey suggesting construction sector growth picked up to a five-month high in October. The Markit/CIPS construction PMI headline activity index rose to 53.9 in October from 50.1 the previous month. The survey contrasts with older data released on Tuesday on UK growth in the third quarter. Those figures showed the UK economy grew by 0.5% in the third quarter, but that construction sector output dropped by 0.6% . The more timely PMI survey showed new orders rose at their fastest pace for five months but firms' expectations for business over the coming year fell to their weakest in almost three years. "The outlook for the sector remains uncertain, with October seeing a further weakening in sentiment regarding business expectations," said Markit economist Sarah Bingham. "Furthermore, the increase in employment recorded was fractional, despite the rise in new business and activity. This suggests that constructors remain tentative about the longevity of the sector's growth profile."