Eurozone Factory Growth Slows At The Start Of 2016, Deflation Fears Grow

Growth in eurozone’s manufacturing sector slowed in the first month of the year, even as factories slashed prices at their steepest rate in a year, a survey released Monday showed. In its monthly manufacturing report, Markit Economics revealed that the rates of expansion of output, new orders, and new export business all slowed in January, dragging down production in the 19-nation bloc.

The manufacturing Purchasing Managers’ Index (PMI) for the eurozone dropped to 52.3 in January from December’s 53.2, in line with an earlier flash estimate. Any PMI figure above 50 indicates growth, while a reading below 50 indicates contraction in the sector.

“The eurozone’s manufacturing economy missed a beat at the start of the year. Having accelerated for three straight months, the rate of growth slipped from the 20-month high attained at the end of 2015,” Chris Williamson, Chief Economist at Markit, said, in a statement.

According to data released last week, inflation in the eurozone was up 0.4 percent annually in January — a slight improvement over December’s 0.2 percent, but still way below the European Central Bank’s (ECB) target of 2 percent.

The low inflation in the bloc has persisted despite cash injections by the ECB. While the availability of cheap cash weakens the euro, and should, in theory, result in an increase in consumer prices, its impact has been blunted by a plethora of global factors, not least the prevailing low oil prices that have kept inflation at or near zero.

“Input cost pressures also remained heavily toward the downside, as purchase prices fell at one of the fastest rates during the past six-and-a-half years,” Markit said in a statement, adding that for the first time in 11 months, all the countries covered in the survey reported a decline in prices.

As low inflation and muted growth continue to hinder growth in the region, pressure is building on ECB to further loosen its purse strings and, among other things, move its deposit rate further into the negative territory.

“Downside risks have increased again amid heightened uncertainty about emerging market economies’ growth prospects, volatility in financial and commodity markets, and geopolitical risks,” ECB President Mario Draghi said, during a news conference last month. “It will therefore be necessary to review and possibly reconsider our monetary policy stance at our next meeting in early March.”