Euro zone factories hit hard in June, job cuts rise

Euro zone manufacturing took another hefty blow in June and factories are preparing for worse to come, according to business surveys on Monday that showed jobs were cut at the fastest rate in two-and-a-half years.

Markit's Euro zone Manufacturing Purchasing Managers' Index (PMI) was unchanged at 45.1 in June, above the preliminary reading of 44.8 and holding at its lowest reading since June 2009.

Anchored below 50 mark that divides growth and contraction for almost a year now, the survey again showed factories in the region's two biggest economies, Germany and France, are succumbing to a downturn that started in southern Europe.

"Companies are clearly preparing for worse to come, cutting back on both staff numbers and stocks of raw materials at the fastest rates for two-and-a-half years," said Chris Williamson, chief economist at data provider Markit.

"The PMI suggests that the goods-producing sector contracted by around 1 per cent in the second quarter, with this steep rate of decline looking set to accelerate further as we move into the second half of the year."

Released on the heels of a summit of European Union leaders in which they agreed to help Spain and Italy borrow more affordably, the survey only highlighted the huge challenge policymakers face in restoring the currency union's economic fortunes.

Alarmingly, the survey's employment index fell to 46.7 in June, its lowest since January 2010, from 47.1 in the previous month, signalling accelerating job cuts.

With companies like French carmaker Renault last month announcing plans to cut jobs, the factory payrolls look unlikely to recover soon.

The factory output index rose just a tad to 44.7 from 44.6 in May, but still signifying a sharp contraction.

Similar surveys released earlier on Monday showed German and Spanish manufacturing shrank at its fastest pace in three years in June, while the pace of contraction in French and Italian factories eased a little bit.

Signs of easing price pressure provided one of the few positives in the survey. The input price index hit its lowest in three years and the output price index was at its lowest since February 2010.

While toiling against recession in many countries, euro zone manufacturers have at least been aided by a sharp fall in oil prices, which helped keep inflation steady at a 16-month low in June, according to data released on Friday.

That adds weight to economists' belief the European Central Bank will to cut interest rates on Thursday to a new record low of 0.75 per cent. They also said they may have to take more emergency measures to soothe financial markets, a Reuters poll last week found.

Copyright: Thomson Reuters 2012