the analyst says

Eurozone Manufacturing

By Dr. Charles Clarke, Independent Consultant, United Kingdom

According to some industry projections, the European engineering sector is likely to shed 150,000 jobs this year as a result of a continuing slowdown in demand, as companies shift manufacturing to lower-cost countries.

These forecasts underline fears that the weak world economy will cause problems for business for some time. The manufacturing sector has been particularly affected by the 'brutal slowdown' in telecommunications, which is having a big knock-on effect among companies producing mobile phones and switching equipment.

Engineering employs 7.6 million people across Europe, with total sales adding up to more than 1,000 billion euro a year. The sector is one of the best bellwethers of the overall performance of industry.

Economists predict that output by the sector will decline one percent this year, after a 0.5 percent fall last year. There is an expected small bounce back next year.

While many European engineering companies have been hit by the slowdown in the US (a big export destination), competitive pressures have led many to redouble their efforts to shift production out of high-cost countries in the western part of the continent.

Beneficiaries of this trend, in terms of employment, were countries such as Poland, the Czech Republic and Hungary. There is evidence that the shifts eastwards are happening in the east as well. For instance, companies in Slovenia are moving production to Romania because costs are lower.

Countries in North Africa also appear to be increasing engineering employment, as a result of relocations. Companies in Spain are finding they could set up plants that were more competitive in countries such as Morocco.

This migratory trend shows up in forecasts for investment by the industry in plant and buildings. Spending by the engineering industry on these areas is set to decline 1.5 percent this year, after a 2.7 percent fall in 2001.

Finland this year appears to be leading the way in terms of an investment drop, with a projected decline of 11 percent. Some of this is linked to a downturn in the mobile telecoms sector and the problems facing Nokia, the large Finnish mobile phone company. France is forecast this year to see an investment decline of 5 percent.

Falls in investment are also likely in 2002 in Germany, Sweden and the UK while Austria, Italy and Belgium are considered likely to buck the trend and show an upturn in spending.

Against this backdrop research in Germany rang alarm bells over the strength of the recovery in the eurozone's largest economy, when growth forecasts for 2002 were cut to 0.7 percent, from 0.9 percent. Projections for 2003 growth were also lowered to 2.3 percent from 2.4 percent. There was also an unexpectedly sharp drop in its business climate index, to 89.9 in July from 91.3 in June.

The pace of the recovery will slow down again because the momentum coming from the world economy will weaken, and monetary policy is likely to be tightened somewhat.

These forecasts assume that the European Central Bank will raise its benchmark interest rate by 25 basis points over the winter, and that the euro will continue to strengthen slightly against the US dollar.

Other figures released recently showed growth in eurozone manufacturing softening in July, bringing an end to the upwards trend of the previous eight months.

The Reuters-NTC Research purchasing managers index (PMI) fell for the first time in nine months to indicate a slight easing in the rate of expansion in July. The overall PMI index fell to 51.6 in July from 51.8 in June. A reading above 50 indicates expansion and below 50 indicates contraction.

Klaus Baader of Lehman Brothers said, "Today's survey adds to the body of surveys that suggest confidence has peaked. This suggests that financial market volatility may have had an additional impact on sentiment."

Output rose in all main national economies but performance varied significantly throughout the eurozone. Germany again recorded the slowest growth in output followed by the Netherlands and Italy. The PMI output index was unchanged at 53.5. Eurozone manufacturing output has now risen for six months in a row.

New orders improved again in July with order books growing at the fastest rate since January 2001. The strongest increases were in France and Ireland. In Germany, however, there was only marginal growth in new orders, well below the improvement for the other main economies.

Manufacturing employment continued to fall in July, for a fourteenth month in a row. However the rate of job losses has eased over the past six months. Manufacturing employment actually rose in France, Ireland and Greece but these rises were offset by falling employment in the other main economies.

Inflationary pressures appear to be building for eurozone manufacturers despite the recent appreciation of the euro. The input prices index rose to 58.7 in July from 57.4 in June - the fastest rate of increase since January 2001. All of the main national economies reported higher input prices due to appreciation of global commodity prices. The PMI is a composite indicator designed to provide an overall view of manufacturing conditions in the eurozone.

Dr. Charles Clarke is an independent consultant working in the UK. He can be reached at Tel +44 1932 351066 or Email 100570.2010@compuserve.com