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Euro strength curbs eurozone manufacturing growth

Eurozone manufacturing activity was at its strongest in three years last month, according to a closely-watch monthly report, but the slowing rate of improvement raised concerns about the possible impact the strong euro was having on the region's economy.

The Reuters eurozone manufacturing purchasing managers' index rose for a fifth consecutive month to 52.5 in January, broadly in line with economists' expectations and up from 52.4 in December. A reading above 50 indicates expansion in a sector.

Output rose in all the countries surveyed, with the fastest growth in Austria, followed by France and Germany. But stocks of finished goods fell at the fastest rate in four years as demand grew - the new orders component of the survey rose for a sixth straight month.

The pick-up in demand came mostly within the eurozone, said the report, with the strong level of the euro weighing on the growth of exports. There was however little sign of a pick-up in job creation with the index registering 48.4, implying falling employment for the 32nd consecutive month.

Observers said the strength of the euro could be behind the PMI's recent sluggishness.

"This has got to be of some concern to the ECB, not least because the domestic background is so awful at present," said Robert Prior-Wandesforde, economist at HSBC .

The European Central Bank meets on Thursday to discuss monetary policy. Although officials have begun voicing concerns over the impact of euro strength on the tentative economic recovery, there are few signs the bank is preparing to lower rates to ease the tightening caused by currency appreciation.

Daragh Maher, strategist at ING Financial Markets, said there was nothing in the report that might change the ECB's line yet.

"A further significant euro appreciation, perhaps triggered by a bland G7 communiqué over the coming weekend, might quickly alter the outlook for Europe's manufacturing exporters," he added.

Of the purchasing managers' indices for the individual countries, France saw a firm rise to 53.5, an 18-month high, while Germany's remained at a three-year high of 53, unchanged from December. In Italy, the third-largest economy in the eurozone after Germany and France, manufacturing activity slowed, dropping to 51.1 from 51.9.

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