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Worst may be over for euro zone factories: PMI

By Jonathan Cable

LONDON (Reuters) - Euro zone factories had their best month in nearly a year during January as burgeoning German output offered support amid signs the worst may be over for the troubled currency bloc, a survey showed on Friday.

While Markit's Purchasing Managers' Index (PMI) pointed to a continued decline in activity, it rose to an 11-month high, suggesting the downturn in manufacturing output - which fell for most of last year - has passed its nadir.

The PMI rose to 47.9 from December's 46.1, ahead of an earlier flash reading of 47.5. The index has been below the 50 mark that separates growth from contraction since August 2011.

The output index, which feeds into a broader gauge of the economy, the Composite PMI, due next Tuesday, rose to a 10-month high of 48.7 from December's 46.0. That was the biggest one-month jump in a year.

"While the industrial sector looks likely to have acted as a drag on the euro zone economy in the final quarter of last year, deepening the double-dip downturn, the PMI provides hope that the first quarter could mark the start of a turnaround," said Chris Williamson, chief economist at Markit.

"Providing there are no further setbacks to the region's debt crisis, these data add to the expectation that the euro zone is on course to return to growth by mid-2013."

The bloc's economy likely contracted 0.4 percent at the end of last year, chalking up its third negative quarter, and will only stagnate in the current period, according to a Reuters poll published last month.

An earlier PMI of 49.8 from Germany, Europe's largest economy, showed factory activity just about held steady last month with the index seeing its biggest one-month jump since the middle of 2009. Germany's output index leapt to 51.9 from 47.1.

But in neighboring France, the downturn deepened with the manufacturing PMI for the bloc's second-largest economy sinking to a four-month low of 42.9.

The Italian and Spanish PMIs both moved in the right direction, beating expectations for more modest improvements, as new export orders rose.

"The improvement was led by Germany, which saw the strongest gain in output of all euro zone states, but rising exports are also helping to revive the manufacturing sectors of other countries, most notably Spain and Italy," Williamson said.

An improvement in export orders, which include purchases from within the bloc, came despite the euro hitting an 11-month high last month on signs of an economic upturn in Germany and hopes the euro area banking system may be on the mend.

Last year, European Central Bank President Mario Draghi promised to do "whatever it takes" to save the euro, triggering a rally in European stock markets and easing the sovereign debt crisis as borrowing costs plunged.

Backlogs of work were run down at their weakest rate since July 2011, with the sub-index rising to 47.1 from December's 45.1, in a further signal that order books were filling up.

But factories were forced to cut their prices for the seventh time in eight months, despite rising input costs, to drum up business and instead reduced headcount to increase profitability.

Official data due later on Friday is expected to show unemployment rose to a euro-era high of 11.9 percent in December.

Markit's PMI for services firms, which account for the vast bulk of the euro zone's private economy, is due on Tuesday and is expected to show the rate of decline eased.

- Detailed PMI data are only available under license from Markit and customers need to apply to Markit for a licence.

To subscribe to the full data, click on the link below: http://www/markit.com/information/register/reuters-pmi-subscriptions

For further information, please phone Markit on +44 20 7260 2454 or email economics@markit.com

(Editing by Hugh Lawson)

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