U.K. factory growth slowed more than forecast last month and Italian manufacturing shrank as Europe suffered the fallout from weakening demand and mounting geopolitical risks.
Markit Economics said its euro-area gauge fell more than initially estimated last month, with the index for Italy unexpectedly dropping below 50, indicating the first contraction in 14 months. In the U.K., manufacturing grew the least in more than a year, with spillovers from the weak euro region among the factors cited. There was also a slowdown in China’s factories last month, a separate report showed.
Sentiment across Europe has been hit by the conflict between Ukraine and Russia, undermining spending and company investment and keeping central banks on alert about risks to their economies. European Central Bank President Mario Draghi has signaled that the euro-area economy may need more stimulus to avoid a deflationary spiral and Bank of England Governor Mark Carney has said intensifying geopolitical threats add to the case for keeping record-low interest rates.
“The economic slowdown which began in the euro-zone core in spring is spreading,” said Christian Schulz, an economist at Berenberg Bank in London. “The latest escalation of Russia’s aggression, and the likely stepping up of Western sanctions and Russian countersanctions, indicate that the overall weakness could get worse.”
Fighting in Ukraine continued over the weekend and European Union governments agreed to impose new sanctions on Russia if the conflict worsens. The U.S. welcomed the EU’s decision and called on Russia to “immediately” remove its military from Ukraine and end supporting separatists in the country.
In the euro area, a Purchasing Managers’ Index fell to 50.7 from 51.8 in July, below an Aug. 21 preliminary reading of 50.8, London-based Markit said. The index for Germany, the region’s largest economy, declined to 51.4 from 52.4, also below a previous estimate, while Italy’s dropped to 49.8 from 51.9.
“Euro-zone manufacturers are clearly finding life very difficult at the moment,” said Howard Archer, an economist at IHS Global Insight in London. “This heightened uncertainty has clearly hit business and consumer confidence and it is likely causing some orders to be delayed or even canceled.”
Italian government bonds rose, with the yield on the country’s 10-year debt slipping 1 basis point to 2.42 percent as of 2:20 p.m. London time. The rate on similar-maturity German bunds was little changed at 0.89 percent. The euro was at $1.3137, also little changed.
The weakness in the euro-region economy is taking its toll on the U.K., where the factory PMI dropped to the lowest since June 2013 and an increase in export orders was the slowest since March. Rob Dobson, a senior economist at Markit in London, said it was “noticeable” that any growth in foreign demand was centered on North America, Asia and the Middle East.
“U.K. industry is not immune to the impacts of rising geopolitical and global market uncertainty, especially when they affect economic growth and business confidence in our largest trading partner,” Dobson said.
The factory slowdown last month wasn’t unique to Europe. Markit’s manufacturing PMI for China fell to 51.1 from 51.7, joining weaker-than-anticipated credit, production and investment data in suggesting the economy is losing momentum.
In Europe, both the ECB and the BOE hold policy meetings this week. Comments from Draghi on Aug. 22 have raised expectations that the ECB is now closer to quantitative easing, a form of stimulus it has long avoided. Inflation in the euro region slowed to 0.3 percent in August, the lowest since 2009.
The ECB “will use all the available instruments needed to ensure price stability,” Draghi said at the Federal Reserve Bank of Kansas City’s annual symposium in Jackson Hole, Wyoming. “We stand ready to adjust our policy stance further.”
The BOE will keep its benchmark interest rate at 0.5 percent after its meeting concludes on Sept. 4, according to all 49 economists in a Bloomberg News survey. In addition to focusing on weak wage growth as a sign of limited inflationary pressures, Carney has highlighted risks from overseas.
“Geopolitical risks have intensified, and structural adjustment continues in the euro area, where growth is expected to be modest,” he said on Aug. 13 as he published new economic forecasts from the central bank.