Analysts say cut is imminent as German manufacturing contracts for first time in five months
Weaker than forecast factory output in Germany and China sent the oil price below $100 on Tuesday and raised expectations that the European Central Bank will cut interest rates at its monthly meeting next month.
German manufacturing contracted for the first time in five months while France, Italy and Spain suffered steep cutbacks in output. China maintained its recent upturn in output, though at a slower pace. Data from the US also showed a slowdown at its factories in April.
The ECB is poised to reduce the base rate from 0.75% after months of bleak figures from across the single currency zone. Analysts said a rate cut was imminent after Jens Weidmann, head of Germany's central bank, conceded that lower interest rates would be considered should there be a worsening in the economic data.
The prospect of cheaper funds from the ECB sent stock markets soaring. The FTSE 100 shrugged off the poor manufacturing figures to climb 125 points to 6406 while the Paris CAC finished the day up 3.6% at 3783.
The gloomy state of the eurozone economies, which has surprised officials in Brussels, is likely to continue through the summer months, said analysts.
The European Commission and the ECB had previously forecast a recovery in the second half of the year as a crisis that has forced Greece, Ireland, Portugal and Cyprus to apply for bailouts appeared to be receding.
But northern Europe has increasingly suffered as austerity cuts in the south hit their exports.
Christoph Weil, economist at Commerzbank, said it was likely the ECB will reduce interest rates to 0.5%, in line with the Bank of England.
"Investors are convinced the ECB will do whatever it takes to prevent a breakup of the monetary union. However, the central bank cannot solve the structural problems in the crisis countries with the printing press.
"For this reason the economic outlook for these countries remains rather gloomy. And the impact is felt not only by companies in the crisis countries. The lack of demand from the periphery is affecting also the core countries. As long as there is no marked improvement in sales prospects, even the low interest rates are unlikely to induce companies to invest more," he said.
The US manufacturing sector also slowed, growing at its slowest pace in six months during April following a downturn in the domestic market. Markit's US manufacturing purchasing managers' index (PMI) fell to 52 from 54.6, remaining just above the 50 level that marks the line between growth and contraction.
Chris Williamson, chief economist at Markit, said the findings suggested output growth was slowing sharply in the second quarter.
"While this week's first quarter GDP numbers may... bring some brighter news on the economy, the picture looks to have already begun to darken again, with GDP growth set to weaken in the second quarter."
The US data "will obviously add significantly to concerns, most recently related to the softer China and German data, that another seasonal slowdown in the global economy is taking hold," said Alan Ruskin, Deutsche Bank's head of G10 currency strategy.
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