Euro-Area Factories Extend Slump as ECB Stimulus Debate Heats Up

(Bloomberg) --

The euro area’s manufacturing recession continued for a seventh month in August, adding pressure on the European Central Bank and national governments to add stimulus.

IHS Markit’s Purchasing Managers’ Index came in at 47.0, matching the initial estimate and only a slight improvement on July’s number. Readings below 50 signal contraction. Order books shrank -- particularly in Germany, the largest economy -- and companies cut backlogs of work and shed jobs in a sign that they have excess capacity.

“Prices are falling as companies offer discounts in the face of disappointingly weak demand,” said Chris Williamson, chief business economist at IHS. “Payroll numbers are being culled at one of the steepest rates seen over the past six years as companies increasingly seek to cut costs in the uncertain trading environment.”

ECB policy makers will decide on Sept. 12 whether to cut interest rates to bolster growth, but some officials are opposed to larger steps such as restarting bond purchases.

Speculation is mounting that governments will soon have to add fiscal stimulus. Germany, which is running a budget surplus, has signaled it may be willing to do so if the economy deteriorates further.

Factories face multiple risks, including U.S. President Donald Trump’s ongoing protectionism and the prospect of a disorderly Brexit if the U.K. leaves the European Union on Oct. 31 without a transition agreement.

“A marked deterioration in optimism about the year ahead suggests companies are expecting worse to come,” Williamson said.

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