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A forklift truck lowers a copper slab onto wooden blocks for storage in Hamburg, Germany, in this file photo. (Krisztian Bocsi/Bloomberg)
A forklift truck lowers a copper slab onto wooden blocks for storage in Hamburg, Germany, in this file photo. (Krisztian Bocsi/Bloomberg)

Euro zone recovery gets boost from manufacturing, but caution remains Add to ...

European manufacturing is on the upswing as low energy prices, the weak euro and the European Central Bank’s lengthy money-printing exercise, called quantitative easing, finally work their magic.

Fresh data showed a manufacturing increase in December across the euro zone, the global economy’s perennial laggard since the 2008 financial crisis, including bailout victim Greece. The euro zone manufacturing purchasing managers’ index (PMI), published by Markit, came in at its strongest level in 20 months, at 53.2, up from 53.1 in November. Figures above 50 indicate expansion; those below 50 indicates contraction.

The figures will be welcome news for ECB president Mario Draghi, whose year-old quantitative easing program, valued at €1.46-billion ($2.2-billion), appears to be lubricating the economy while removing any immediate threat of deflation.

But Markit chief economist Rob Dobson warned that it’s too early to say the euro zone’s recovery is assured. “While there is much to be positive about in these figures, the underlying picture is still one of solid yet unspectacular expansion,” he said in a note. “With euro zone manufacturing still some 10 per cent off its pre-crisis peak, it looks as if the sector still has some distance to travel before the climb back to full recovery is completed.”

The euro zone and the wider European Union also face the possible end to the Schengen Area passport-free travel zone, which would hurt free trade, and an economic slowdown in China, which soaks up a lot of European exports, from cars to machine tools. Overnight on Monday, the Caixin/Markit manufacturing PMI for China was reported at 48.2 in December, down from 48.6 in November – signalling the fifth consecutive month of contraction.

The falling Chinese PMI helped trigger massive selling on the Shanghai stock market before the North American markets opened on Monday. The blue-chip CSI 300 index was down 7 per cent and might have fallen further were it not for the automatic circuit breakers that halt trading. The rout, which sent European and North American markets spiralling downward and helped to put oil on a roller-coaster ride, came after a losing 2015 on the Shanghai market, which saw 45 per cent of its value wiped out.

Among the euro zone countries, the star was Italy, the second-biggest manufacturer, after Germany. Italy’s PMI landed at 55.6, a 57-month high. Ireland and the Netherlands reported the second and third strongest PMI figures, respectively. Germany’s reading was 53.2, a four-month high. Greece came in at 50.2, a 19-month high.

Economist Howard Archer, of IHS Global Insight, said the strong euro zone PMI numbers bode well for wider euro zone growth. Euro zone gross domestic product climbed only 0.3 per cent in the third quarter and, backed by the manufacturing rise, should rise by 0.4 per cent in the fourth quarter, he said. “Euro zone manufacturers are currently getting appreciable help from very low oil and commodity prices, which is boosting their ability to price competitively to win business,” he said. “In addition, a weak euro is boosting euro zone manufacturers’ competitiveness in international markets.”

In the EU countries, Britain was the disappointment. Its PMI dropped to 51.9 last month from 52.5 in November as new orders came in at their slowest pace in five years. But economists said that strength in the British services sector should overcome any weakness in manufacturing, which is relatively small by German and Italian standards.

In a note, ING Financial Markets said: “Over all, the economy remains strong and the case for a rate hike in 2016 looks very compelling. Although we continue to forecast a hike in the second quarter, the risks surrounding the [British] EU referendum are beginning to build and the probability that the Bank of England will leave rates lower for a longer period of time is increasing.”

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