Euro zone manufacturing activity fell into contraction for the first time in three years in June as a strong euro dented exports while output prices matched April's year high, a key survey showed this morning.
The RBS/Markit Eurozone Purchasing Managers Index for the manufacturing sector dropped to 49.2 in June, down from May's 50.6, but up slightly from the flash estimate and median forecast by economists of 49.1.
The index fell below the 50 level that separates growth from contraction for the first time since June 2005 and the outlook is bleak with new orders at a five-year low.
The euro was little moved on the data.
Data released earlier showed business sentiment in Japan worsened for manufacturing firms over the last three months and manufacturing activity in the United States is expected to have fallen further into contraction when figures are revealed later.
However, the European Central Bank is expected to raise rates when it meets this week as it battles record high inflation despite escalating evidence of a sharp slowdown in economic activity.
"I don't think it's enough to make the ECB change tack, especially after the 4 per cent inflation ... but if it continues like this, this would be in line with stable interest rates (at 4.25 per cent) in the second half of 2008," said Gilles Moec at Bank of America.
Data released yesterday showed inflation in the 15-nation euro zone soared to a record 4 per cent in June as oil got even dearer and food prices rose at an alarming rate.
The survey showed input prices hit a two-year high of 70.8, up sharply from May's 66.9, and the 70.0 flash estimate, although manufacturers were able to pass on some of the increase, with output prices rising to 56.4, matching April's one-year high.
A strong euro, which hit an 11-month high against the yen in June and has strengthened against the dollar after the United States Federal Reserve slashed interest rates to boost a slowing economy, has dented exports as they become more expensive.
And the picture across the big four economies in the region will make worrying reading for the ECB. Germany, the euro zone's biggest economy, saw its index fall to 52.6 from 53.6, while France's dipped into contraction for the first time in three years at 49.2.
Spain slumped further into negative territory to 40.6, its seventh month below the 50 level, and Italy dropped to 46.9 from 48, marking its fourth month of contraction.