German, U.K. Manufacturing Drop as Growth Slows Across Europe

By Jennifer Ryan and Simone Meier

July 7 (Bloomberg) -- Manufacturing in Germany and the U.K. declined in May, choked by record commodity prices and slowing economic growth across Europe.

German production, adjusted for seasonal swings and inflation, dropped 2.4 percent from April, the biggest decline since February 1999, the Economy Ministry in Berlin said today. The index of U.K. manufacturing production unexpectedly fell to the lowest since September, slipping 0.5 percent on the month.

The global slowdown is rippling through Europe's economy as inflation accelerates and higher credit costs drag down house prices in parts of the region. The U.K., Spain and Ireland are close to recessions and evidence is mounting that Germany, an engine of European growth since financial markets seized up last year, is also starting to slow.
``The writing had been on the wall for the U.K. for a while and now the combination of tighter lending conditions and high inflation is bringing the rest of Europe down with it,'' said James Nixon, an economist at Societe Generale SA in London. ``We're heading for a sharp slowdown.''

The pound dropped after today's report, falling 0.6 percent to 79.61 pence per euro. It declined 0.8 percent against the dollar to $1.9687. The euro slipped 0.3 percent to $1.5659. Brent crude oil soared above $146 a barrel for the first time last week, while prices for wheat and rice reached records this year.

Today's reports indicate the European Central Bank has limited scope to add to last week's interest-rate increase as it tries to combat the fastest inflation in 16 years. Bank of England policy makers will probably leave their key rate unchanged this week, said all but one of the 49 economists in a Bloomberg survey.

`Significant' Drop

Heidelberger Druckmaschinen AG, the world's largest printing- press maker, last month forecast a ``significant'' drop in full- year profit partly on waning demand. RPC Group Plc, the U.K. maker of plastic containers for Nivea sun cream, said June 18 that its full-year profit dropped 66 percent as rising oil prices lifted its operating costs.

Germany's economy has helped the euro region cope with the global slowdown, which was sparked by the U.S. subprime mortgage rout last year. Now exporters are struggling to cope with a stronger euro that's making their goods more expensive abroad.

``Manufacturers are under pressure from all sides,'' said Alexander Koch, an economist at UniCredit Markets & Investment Banking in Munich. Europe's single currency has surged 15 percent against the dollar and 18 percent against the pound in the past year.

Manufacturing Orders

German manufacturing orders unexpectedly declined for a sixth straight month in May, a report showed July 4. The last time orders fell for five consecutive months or more was in 1992 and Europe's largest economy shrank the following year. Today's drop in manufacturing production may have been exacerbated by the fact that many Germans took two days off in May to bridge the gap between a public holiday and a weekend, the government said.

The German slowdown comes as much of Europe buckles under the weight of higher credit costs. In Spain, industrial production fell the most in six years in May. Irish unemployment rose in June to the highest in almost a decade.

Falling house prices are also dragging down growth in Britain after a decade-long boom. Property values dropped 6.3 percent in June, the worst annual decline since 1992, Nationwide Building Society says. Services from airlines to the finance industry contracted last month by the most since October 2001.

Today's U.K. manufacturing report showed an unexpected drop, as economists forecast stagnation, the median of 25 estimates in a Bloomberg News survey shows. The index of manufacturing production fell to 102.7, the lowest level since September.

``The outlook for the economy is clearly deteriorating and the risks of a recession are rising,'' said Nick Kounis, an economist at Fortis Bank NV in Amsterdam and a former U.K. Treasury official. ``The bank is still facing huge inflationary pressures. Rates will be on hold this week.''

British companies' demand for staff fell for the first time in five years last month, a report by accountancy firm KPMG and the Recruitment and Employment Confederation showed today.

``This really is a sobering set of figures proving the credit crunch has finally taken its toll and is now severely weakening the U.K. jobs market,'' said Alan Nolan, a director at KPMG.