Europe ‘at epicentre’ of global manufacturing slump as costs soar

Europe is at the epicentre of a global manufacturing slump, according to a closely watched survey that showed the bloc's two biggest economies are struggling to remain competitive.

Activity in Germany's key manufacturing sector fell to its lowest level in two years amid soaring energy costs that continue to push up prices. Last month, the Kremlin announced an indefinite shutdown of the key Nord Stream 1 gas pipeline that links Russia to Germany, which drove a spike in prices.

Germany's manufacturing activity fell to 47.8 in September, from 49.1 the previous month, according to the S&P Global PMI, taking it further below the 50 level that divides growth from contraction. Analysts said “a growing number of customers” had either postponed or cancelled orders due to rising prices.

French order books also shrank in September, with close to a third of businesses reporting a fall in new business as clients were also put off by higher costs.

French car manufacturers were particularly affected, the analysis showed.

Joe Hayes, senior economist at S&P Global market intelligence, said Europe was “at the epicentre of a global manufacturing downturn”.

He added: “Production fell at a rate which has only been exceeded during crisis periods. New orders also fell at a rapid pace, reflecting the hesitancy among clients to purchase goods at expensive prices.”

Optimism about future orders in Germany also sank to a two-year low, according to S&P Global. Phil Smith, associate director, said the data “indicated a sustained downturn in Germany's manufacturing sector, with goods producers coming under pressure from a deepening decline in demand as well as an energy-led rise in cost inflation.”

Separate UK manufacturing data showed the downturn in factory activity also continued in September amid a fall in new orders. Prices also continued to rise. While the overall activity gauge rose slightly to 48.4 in September, up from 47.3 in August, the reading still indicates a decline.

Economists expect the manufacturing sector, which drives around 10pc of the UK economy, to act as a drag on growth in the third quarter. The economy as a whole is also expected to shrink in the three months to September.

Martin Beck, chief economic adviser to the EY ITEM Club, said tax breaks introduced by former chancellor Rishi Sunak were unlikely to drive a huge rebound.

He said: “Though the impending end of the ‘super deduction’ capital allowance should provide some support to demand for investment goods over the next few months, there's an increasing risk that this will be more than offset by the squeeze on household finances and increasing signs of weakness in the global economy.

“We expect manufacturing activity to continue to contract in the near future.”