Euro zone factory downturn deepens

Euro zone factory activity contracted further in April, albeit not by as much as initially thought, while the cost of raw materials fell at the fastest pace in nearly three years, a survey showed on Tuesday.

The HCOB final manufacturing Purchasing Managers' Index (PMI), compiled by S&P Global, fell to 45.8 in April from March's 47.3, just beating a preliminary reading of 45.5 but well below the 50 mark separating growth from contraction for a 10th consecutive month.

An index measuring output, which feeds into a composite PMI due on Thursday that is seen as a good guide to economic health, dropped back below the breakeven mark to 48.5 from 50.4.

"This decline has been fairly broad-based across the euro zone, with regional PMI indices in France and Italy also showing a drop in output, while output in Germany and Spain was nearly stagnant," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

Input costs falling at the fastest pace since May 2020 meant factories barely increased their prices yet demand still weakened. The output prices index fell to a 29-month low of 51.6 from 53.4.

"Nevertheless, central bankers have no reason to relax. That's because both the PMI flash services price data for April and the Eurostat data available through March for services inflation continue to reflect significant price pressures," de la Rubia added.

The European Central Bank is widely expected to increase interest rates by 25 basis points on Thursday as it fights to bring inflation back to its 2 per cent target.