Factories in Britain and Germany suffered a sharp slowdown in September, raising fears that economic recovery is losing momentum against a backdrop of global political turmoil and the flagging eurozone economy.

In the UK growth in manufacturing activity was the slowest in 17 months as demand for British goods waned at home and abroad.

In Germany, long the powerhouse of the eurozone, the sector shrank for the first time in 15 months, hit by Russian sanctions over the Ukraine crisis and general malaise across the economies of the currency bloc.

Stock markets fell in Britain, across Europe and in the US, after investors took fright at the weak manufacturing reports and the first confirmed Ebola case in the US. The FTSE 100 fell 69 points or 1% to 6,553.99. In the US the Dow Jones was down 218 points by mid afternoon in New York.

“The world economy is still performing reasonably well, but there are signs that growth is softening,” said Andrew Kenningham, senior global economist at Capital Economics.

The pound fell to a two-week low of $1.6164 against the dollar after the weak UK data was published by Markit/CIPS. It was the lowest level against the dollar since the eve of the Scottish referendum vote, although the pound recovered some of its losses later in the day.

The headline index on the Markit/CIPS UK purchasing managers’ index (PMI) combines output, orders, employment and prices. It fell to 51.6 in September from 52.2 in August (a reading above 50 indicates expansion).

It was the slowest rate of growth since April last year and the third monthly drop in the index, disappointing City forecasters who said the surprise fall took any remaining prospect of an imminent rise in interest rates definitively off the table.

James Knightley, an economist at ING, said: “This is a 17-month low and further diminishes the prospect of Bank of England policy tightening in November. One possibility is that the uncertainty generated by the close polls in the lead-up to the Scottish independence referendum made business cautious and therefore led to a delay in orders.”

Germany had recovered all but 0.1% of its peak manufacturing output in July but the UK was 7.9% down in the same month, though revised national accounts show British manufacturing output down by only 4.5% from its highest point.

New UK export orders have barely grown, putting growth at the slowest rate in almost 18 months, further frustrating George Osborne’s aim to rebalance the economy away from consumer spending and financial services and towards manufacturing and exports.

Rob Dobson, an economist at Markit, said the UK manufacturing sector was losing momentum. “The strong upsurge in the UK manufacturing sector at the start of the year appears to have run its course. Inflows of new work slowed in domestic and export markets. Overseas demand was reined in mainly by the ongoing lethargy of the eurozone and the appreciation of sterling against the euro.”

The contraction in Germany’s manufacturing sector shocked economists who were expecting a small increase in activity. The headline index fell to 49.9 in September from 51.4 in August.

Oliver Kolodseike, an economist at Markit and author of the report, said it painted a worrying picture for German manufacturing.“Surveyed companies reported that a weakening economic environment, Russian sanctions and subdued growth in key export destinations, were behind the disappointing reading.”

New factory orders fell to their lowest level since the end of 2012, boding ill for the immediate future. The situation also deteriorated for the sector in the wider eurozone, where manufacturing growth almost came to a halt in September. The PMI dropped to a 14-month low of 50.3 from 50.7 in August.

Kenningham said the weak performance made it more likely that the European Central Bank would announce more radical stimulus measures for the eurozone economy.

“There has been no let-up in the flow of bad news from the eurozone. We expect [ECB president Mario] Draghi to hint strongly at [today’s] ECB meeting that a large-scale government bond purchase programme is on its way.”

Some countries in the single currency bloc fared better. Where Germany joined Austria, Greece and France as those seeing contractions, the most rapid growth was in Ireland and Spain – although in both countries it was slower than in recent months.

While Spain’s manufacturing sector is starting to recover, July’s data showed output was still nearly a third below its peak in 2008. Madrid has worked hard to put a positive gloss on recent growth, but much of the sector was wiped out in the financial crash and has yet to return.

Italy’s manufacturing sector also had a colossal fall in output in the wake of the financial crisis and was 26.6% below its peak in July.

Growth in the US manufacturing sector slowed slightly in September but remained strong, with the PMI index edging down to 57.5 from 57.9 in August.


Angela Monaghan and Phillip Inman

The GuardianTramp

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