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Eurozone and UK manufacturing PMI beat forecasts but Greek output plunges

The final manufacturing PMI for the Eurozone was revised slightly higher to 52.4 from the initial reading of 52.2 in July, versus estimates that it would be unchanged. The UK’s manufacturing PMI for July was also positive as it came in at 51.9, which was above estimates of 51.6.

In the Eurozone, strong growth was recorded in Netherlands, Italy and Spain, which outperformed the rest of the euro area. Germany saw slightly slower pace of expansion compared to June but in France, manufacturing activity went into contraction again after reversing a year-long decline in June.

Greece was the worst performing Eurozone member as its PMI reading dropped to a record low of 30.2 in July as the Greek debt crisis hit its peak, leading to the introduction of capital controls and the closure of banks. Output, new orders and employment levels all fell sharply, beating the previous low seen in February 2012.

But there were little signs of contagion to other Eurozone economies as overall, the Eurozone saw higher orders from both domestic and overseas demand. Manufacturing PMI has now been in expansion territory since July 2013 and employment in the sector has also been steadily recovering.

Meanwhile in the UK, the manufacturing PMI for July showed a small improvement, rising to 51.9 from 51.4 in June. The rise was mainly due to higher domestic demand as export orders fell for the fourth month in a row. The stronger pound continued to dent overseas demand, particularly against Eurozone markets. But growth in overall new orders also slowed down, suggesting a weak outlook for manufacturers. Employment in the sector continued to rise though, increasing for the 27th month in a row in July.

The mixed picture for UK manufacturing will make the balancing act for the Bank of England much more difficult. While Eurozone economies recover with the help of a weaker euro and quantitative easing, UK growth has been mainly driven by strong domestic demand and consumer spending. As the pound continues to march higher, this could eventually push UK manufacturing into recession, forcing the Bank of England to delay or limit any rise in interest rates. The Bank of England has already indicated that interest rates are likely to start rising at the beginning of 2016.

The data had limited impact on the euro but the pound fell against both the single currency and the dollar as the July figures slightly weaken the future rates outlook for the UK. The euro was marginally lower at 1.0959 against the dollar but edged higher against sterling at 0.7032. The pound fell below 1.56 against the dollar in mid-European session to drop to 1.5582.

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