Euro-Zone Manufacturing Shrinks in December

By ALEX BRITTAIN

 The Wall Street Journal

Activity among euro-zone manufacturers shrank further in December, a gauge of activity showed Wednesday, as factories across the currency area's biggest economies cut back on their output.

The figures add to evidence that the euro-zone economy shrank in the fourth quarter and will continue to struggle in early 2013 at least. Other developments Wednesday suggested some of the bloc's most vulnerable members, Ireland and Italy, may have passed their worst point, even as the so-called "core" nations lose momentum.

Data company Markit said its monthly index, based on a poll of manufacturing purchasing managers, edged down to 46.1 in December from 46.2 in November. The figure was reduced compared with its 46.3 preliminary reading last month and is well below the 50 threshold, signaling a sharp contraction in activity in December.

Britain's Manufacturers Bounce Back

"The euro-zone manufacturing sector remained entrenched in a steep downturn at the end of the year," said Chris Williamson, chief economist at Markit, in a statement accompanying the release. "The region's recession therefore looks likely to have deepened, possibly quite significantly, in the final quarter," he said.

The 17 euro-zone nations recorded a second straight fall in economic output in the third quarter, meaning they are in recession, based on a commonly used definition. Gross domestic product fell 0.1% in the third quarter, after shrinking 0.2% between April and June.

Developments in Italy and Ireland suggested some brighter prospects for the euro-zone economy, where authorities have struggled to control the debt crisis that has enveloped highly indebted countries such as Greece and Portugal and threatened to engulf others, including Italy.

Italy, the third-largest economy in the bloc, posted its least-negative factory activity reading in nine months. The manufacturing index rose to 46.7 from 45.1 in November. New orders, especially those for export, fell at a lesser rate than in previous months.

Ireland continued to be the only euro-zone country measured individually by Markit to show month-to-month growth in manufacturing, holding above the 50 threshold. Its index edged down to 51.4 from 52.4. Deputy Prime Minister Eamon Gilmore said Wednesday the country remains on track to exit its bailout program and get back to funding itself in financial markets this year.

Fellow bailout recipient Greece showed scant sign of improvement, as manufacturing suffered a deeper month-to-month drop that was by far the most severe of the euro-zone countries. Its manufacturing index fell to 41.4 from 41.8. Figures earlier this week from Greece's statistics agency showed retail sales fell 16.8% in October from the corresponding month a year earlier, much steeper than the 11.8% drop registered in September.

The bloc's two biggest economies, Germany and France, registered further declines in manufacturing that add to concerns about the resilience of the euro zone's stronger northern economies against the wider downturn.

Germany's index was revised down sharply to 46.0 from the initial reading of 46.8.

"Even the German industrial sector—supposedly the hypercompetitive engine of euro-zone growth—remains deep in recession territory," said Jonathan Loynes, chief European economist at Capital Economics, a consultancy.

Inflation data showed that while price growth is relatively subdued in Germany—holding at around the European Central Bank's target rate—it is much stronger in Spain. That undermines hopes that the bloc will be able to swiftly rebalance to make countries such as Spain more competitive relative to countries such as Germany, because high inflation is likely to make it harder to suppress wage growth.

Figures from individual states in Germany, published Wednesday, suggested an annual inflation rate of around 2% for the country as a whole. Nationwide data will be published later Wednesday. In Spain, the Consumer Price Index held firm to show annual growth in prices of 3.0%, in European-Union harmonized terms.

The ECB aims to keep annual euro-zone wide inflation a little below 2.0% on an EU-harmonized basis. In November, the euro-zone inflation rate was 2.2%.

In France, registrations of new cars slumped 14% in 2012 to the lowest level in 15 years, the automobile manufacturers' association said Wednesday. In Spain, too, registrations fell 13% on the year.

Austria, another economy that has remained largely resilient during the crisis, suffered a steep rise in unemployment in December as unusually cold weather hit the construction sector. The jobless rate jumped to 8.6% from 7.2% in November.

—Jason Douglas contributed to this article.

Write to Alex Brittain at alex.brittain@dowjones.com

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