European September Manufacturing Contracts, Unemployment Rises

By Ben Sills and Fergal O'Brien

Oct. 1 (Bloomberg) -- European manufacturing contracted more than initially estimated and unemployment rose to the highest in a year as the deepening credit crisis slowed growth.

Markit Economics's manufacturing index dropped to 45 in September from 47.6 in August, lower than the 45.3 published on Sept. 23. Unemployment in the euro region rose to 7.5 percent in August, the highest since April 2007, from a revised 7.4 percent in July, according to a separate report.

The euro-region economy, which contracted in the second quarter for the first time since the introduction of the common currency almost a decade ago, saw confidence slide as the U.S. financial meltdown crossed the Atlantic. Akzo Nobel NV, the chemical company that paid $15.9 billion for Imperial Chemical Industries Plc in 2007, said this week it will cut 3,500 jobs as the global housing slump damps demand for paints.

The manufacturing survey will ``heighten fears that the euro zone is headed for recession,'' said Howard Archer, chief European economist at Global Insight Inc. in London. ``On top of this, employment in the sector contracted for a fourth month,'' adding to the ``increasingly worrying news on euro-zone jobs.''

The manufacturing index, based on a survey of purchasing managers by Markit Economics in London, has been below the 50 mark that indicates contraction for four months. The euro region's services industry is also contracting, while confidence among executives and consumers fell to the lowest since the aftermath of the Sept. 11 terrorist attacks seven years ago.

Cost Cutting

Volvo AB, the world's second-largest truckmaker, plans to eliminate 1,400 jobs at factories in Belgium and Sweden to cope with slowing orders. The Gothenburg, Sweden-based manufacturer yesterday said it will take other cost-cutting measures to cope with declining sales and increased raw-material costs.

The financial crisis that forced Lehman Brothers Holdings Inc. to seek bankruptcy-court protection reached Europe this week with the Belgian government joining rescue plans for Fortis and Dexia SA. Stock markets in Europe and the U.S. slumped this week after the House of Representatives rejected a $700 billion plan to rescue the financial system.

The European Central Bank has resisted calls to support economic growth by lowering interest rates, saying that it is more concerned about inflation. Consumer prices in the bloc rose an annual 3.6 percent in September, from a 3.8 percent pace in August.

The European Union statistics office, which published the unemployment report, also revised the jobless rate for May, June and July to 7.4 percent from 7.3 percent. The rate fell to 7.2 percent earlier this year, the lowest since the euro was introduced in 1999.

`Divergent Movements'

Unemployment in the euro area rose by 90,000 to 11.6 million in August, the statistics office said. It increased in France and Spain, and declined in Germany, Europe's largest economy. National data published yesterday showed the jobless total in Germany fell in September, keeping the rate at the lowest in 16 years.

There are ``divergent movements in the region's main economies,'' said Martin van Vliet, an economist at ING Group in Amsterdam. Still, ``employer hiring intentions have deteriorated sharply in recent months, also in Germany, suggesting that the overall eurozone unemployment rate will rise further in the months ahead.''

To contact the reporter on this story: Ben Sills in Madrid at bsills@bloomberg.net; Fergal O'Brien in Dublin at fobrien@bloomberg.net.