[A-List] EU stability & growth pact woes

["Keaney Michael" <Michael.Keaney@xxxxxx>]

Eurozone industry 'on brink of recession'
By Tony Major in Frankfurt
Financial Times: October 2 2002

The eurozone manufacturing sector is teetering on the brink of its
second recession in less than a year, as deepening gloom over global
growth prospects depresses demand.

But economists said stubborn inflationary pressures, bolstered by oil
price rises on the back of possible conflict in Iraq, looked set to
prevent the European Central Bank from moving quickly to ease interest
rates.

Tuesday's Reuters/NTC Purchasing Managers' Index (PMI), seen as one of
the best indicators of eurozone growth prospects, fell from 50.8 in
August through the critical 50 mark, which divides expansion from
contraction, to 48.9 in September.

The steep fall, after just five months of expansion, was driven by sharp
output declines in Germany, which recorded its biggest contraction since
January. The German index fell to 46.0 from 49.1 in August.

The survey showed that manufacturing in France, the second biggest
economy, and in Italy, the third, also suffered a sharp slowdown- though
they narrowly escaped contraction.

"Going into the fourth quarter the outlook is not at all positive," said
Mark Wall, an economist at Deutsche Bank. "A lot of questions are being
asked about the forecast recovery."

Neville Hill, an economist at Credit Suisse First Boston, said the PMI
figures were "consistent with the euro area industrial sector dipping
back into recession".

Economists said the survey figures were particularly worrying because
they gauged real activity, not business confidence. "They are telling us
the underlying economy is suffering now," said Mr Wall.

The ECB warned in its September monthly bulletin that steep stock market
declines were undermining confidence and delaying an expected pick-up in
growth until next year. But it insisted the conditions for a stronger
recovery remained in place.

Economists, however, said the latest figures were likely to encourage
the ECB to scale back its growth expectations. That should mean we see
the ECB becoming more dovish [on interest rates] in coming weeks," said
Mr Hill.

But September's inflation figures, which showed price pressures in the
eurozone edging higher, are likely to limit the ECB's room for
manoeuvre, especially as war in Iraq might push oil prices even higher.

"There is a real danger," said one analyst, "that the ECB, which is
mandated to maintain price stability, will preserve its credibility on
prices at the expense of growth."

Most economists expect the central bank to wait two or three months
before cutting rates, although a sharp slowdown of the magnitude
suggested by Tuesday's figures might trigger an earlier move. But they
said there was a growing risk that Germany, at least, would be back in
recession if the ECB waited too long. The German economy stagnated over
the summer.