Updated Sept. 1, 2014 8:49 a.m. ET
Activity in the euro zone’s manufacturing sector slowed more sharply than first estimated in August, with Italy joining France in contraction, while German factories had their most sluggish month since September of last year.
By contrast, economies that have been hit hardest by the currency area’s fiscal and banking crises showed signs of recovery, with activity in Greece expanding again, while Ireland’s factories had their strongest month since late 1999.
However, fresh signs that the currency area’s economy remains mired in stagnation, with manufacturers cutting jobs in August, will likely add to pressure on the European Central Bank to take more dramatic stimulus measures to boost demand and inflation.
The headline measure from data firm Markit‘s monthly survey of purchasing managers at more than 3,000 manufacturers fell to 50.7 from 51.8 in July, an indication that growth was very modest. A reading above 50.0 for the Purchasing Managers Index indicates an expansion in activity, while a reading below that level signals a contraction.
The final measure was slightly lower than the preliminary estimate of 50.8 released late last month.
Markit said the slowdown likely reflected the impact of rising tensions between the European Union and Russia over the future of Ukraine, as well as growing doubts about the effectiveness of euro-zone economic policy and its likely future course.
“The braking effect of rising economic and geopolitical uncertainties on manufacturers is becoming more visible,” said Rob Dobson, an economist at Markit. “This is also the case on the demand front, with growth of new orders and new export business both slowing in August.”
Reflecting the increasingly gloomy outlook for Europe’s economies, Estonia’s government Monday cut its growth forecast for the second time in six months, and now expects gross domestic product to increase by just 0.5% in 2014, having projected an expansion of 3.5% in autumn of 2013.
“It is clear that besides what is happening in Russia, our closest neighbors Finland and Latvia—and the European Union in general—are also lowering their expectations,” said Finance Minister Jurgen Ligi.
The fresh decline in manufacturing activity in Italy adds to concerns about the inability of the euro zone’s third largest economy to return to sustainable growth six years after the onset of the financial crisis. The economy contracted for the second straight quarter in the three months to June, while figures released Friday showed its first annual decline in consumer prices since 1959, by 0.1%, based on its national measure.
Activity in Spain’s manufacturing sector slowed for the second straight month in August, a sign that the economic recovery may be losing some momentum.
Spain’s economy grew at its fastest quarterly pace in six years during the second quarter, with gross domestic product increasing by 0.6% from the three months to March. The revival of the Spanish economy—the euro zone’s fourth largest—has been one of the few positive developments for the currency area over the past nine months.
The slowdown in manufacturing suggests that the revival may ease in the third quarter, although their were indications in the survey that it is set to persist: manufacturers continued to hire additional workers, while new orders rose at the fastest pace since April 2007.
A survey of Dutch manufacturers also released Monday recorded a similar slowdown in activity during August. By contrast, a survey of Irish manufacturers recorded an acceleration in activity unmatched since December 1999.
The euro zone wasn’t alone in experiencing weakness in manufacturing, and may be dragging down the rest of Europe. U.K. manufacturing activity slowed sharply, while activity declined in Denmark, partly reflecting weak demand for their exports in the euro zone.
Activity also slowed in Poland, the Czech Republic and Hungary. That likely reflects the worsening conflict in Ukraine, but also faltering activity in Germany, with which central European manufacturing has close links.
“It seems that weaker demand from Germany has weighed on local manufacturers to a much larger extent than either Ukraine or Russia,” said William Jackson, an economist at Capital Economics. “After all, Germany is by far the largest export market for the region’s manufacturers and the fall in the region’s PMIs has mirrored the decline in the German survey.”
Markit cut its estimate for Germany’s PMI to 51.4 from 52.0, its lowest level since September 2013.