PRESSURE IS mounting on the European Central Bank to cut interest rates – possibly next week – as a survey showed manufacturing industry in the euro zone shrank for the 15th month running in October as output and new orders fell.

Manufacturers were the driving force behind the bloc’s recovery from the last recession, but the downturn in factory activity that began in smaller periphery countries has now engulfed core members Germany and France.

Flagging growth prospects for the euro zone’s biggest economies will prompt the ECB to ease monetary policy more in the next few months and cut interest rates to a new record low of 0.5 per cent, a Reuters poll showed on Thursday.

“All in all, the picture for the economy remains extremely sluggish. Further rate cuts would be fully justified by the current economic scenario,” said Annalisa Piazza at Newedge Strategy.

The bank holds its next policy meeting on Thursday. Data due on Tuesday is expected to show the bloc’s dominant service sector has contracted for all but one of the last 14 months.

Europe is expected to remain the biggest drag on the world economy next year as its sovereign debt crisis rumbles on, and the situation deteriorated further in Italy and Spain – the two countries most worrying investors with whether they can keep paying their debts.

Ireland was the only one of the 17 countries using the euro seeing growth.

“The situation in the core economies is worsening. Rather than the strength in the core dragging the periphery out of recession it appears more likely that the core will follow the periphery into recession,” said Ben May at Capital Economics.

Markit’s Eurozone Manufacturing Purchasing Managers’ Index (PMI) fell to 45.4 in October from September’s 46.1. The October figure was just up from an earlier reported flash reading of 45.3.

Earlier data from Germany, Europe’s largest economy, showed its manufacturing sector shrank for the eighth month, and French figures showed a decline in all but one of the last 15 months.