Euro zone manufacturing activity fell further in March

Manufacturing across the euro zone fell deeper into decline in March, although the Cyprus bailout crisis has yet to take a toll on factory activity, a business survey showed today.

Markit's euro zone Manufacturing PMI fell in March to 46.8 from 47.9 in February - slightly better than an preliminary estimate of 46.6, but extending its run below the 50 mark that separates growth and contraction for a 20th month.

Factories in Germany and Ireland, the relative bright spots in the February surveys, fell back into decline last month. Everywhere else, the industrial rot deepened.

Still, the escalation of the crisis in Cyprus in the final week of March had little bearing on euro zone manufacturing activity, but that could change this month.

"While in some respects it is reassuring to see the events in Cyprus did not cause an immediate impact on business activity, the concern is that the latest chapter in the region's crisis will have hit demand further in April," said Chris Williamson, chief economist at Markit.

Cyprus struck a €10 billion bailout deal with the European Union and International Monetary Fund last Monday, designed to untwine it from a failed banking sector that has long dominated its economy.

With economic weakness now endemic across the euro zone, economists polled last week said they expect further bailouts for other euro zone countries, with Spain and Slovenia topping the list of likely candidates.

Markit said manufacturers reported increased demand from North America and South Asia, but dire trading within the euro zone itself dragged on order books.

The new export orders index sank to 48.7 last month, after spurting to 51.7 in February - its only time above the 50 growth threshold since June 2011.

The Netherlands and Italy were the only countries to report increases in new export orders.

"Euro zone manufacturing ... looks likely to have acted as a drag on the economy in the first quarter, with an acceleration in the rate of decline in March raising the risk that the downturn may also intensify in the second quarter," said Williamson.

Economists polled by Reuters expect the euro zone economy to shrink 0.1 percent in the first quarter.

The output index, which feeds into the wider Composite PMI due on Thursday, fell to 46.7 in March compared with 47.8 in February, suggesting the euro zone economy concluded the quarter on a poor note.

In France, the PMI inched up to a three-month high in March of 44.0 from 43.9 in February. Markit said panelists reported subdued demand in the face of a weak domestic economy, with new orders declining for 21st month in a row despite firms cutting their prices.

The German manufacturing sector, which accounts for around one-fifth of the German economy, fell to 49.0 in March from 50.3 in February, when it grew for the first time in a year.

Although that marked a rise from an initial reading of 48.9 reported in mid-March, the final figure was the weakest in three months and was below the 50 line that separates growth from contraction. It was also well short of the long-run average of 51.9.

Separately, Britain's manufacturing activity shrank for a second consecutive month in March leaving the country's more resilient services sector as the best hope of avoiding a new recession.

The Markit/CIPS manufacturing purchasing managers' index came in at 48.3, only slightly above February's surprisingly poor reading of 47.9, and a touch weaker than the consensus forecast.

Agencies