Manufacturing, services slow in Europe, producer prices fall

This week's data reporting kicks off on a somewhat downbeat note for Europe.

In the UK, manufacturing production unexpectedly stagnated in September. Bloomberg reports:

Factory output was unchanged after gaining in each of the previous four months, the Office for National Statistics said today in London. Economists had expected an increase of 0.2 percent, according to the median of 30 forecasts in a Bloomberg survey...

Manufacturing output...rose 0.3 percent in August instead of the 0.4 percent reported a month ago.

Industrial production...rose 0.2 percent in September from August. The median of 30 forecasts in a Bloomberg survey was for a 0.4 percent increase. Utilities output fell.

Lower-than-expected industrial production will shave 0.04 percentage point from the third quarter's 0.7 percent growth, the statistics office said.

And the signal from Germany was negative too. From Bloomberg:

German factory orders declined the most in more than a year in September as foreign demand fell, suggesting Europe's largest economy will slow next year.

Orders slipped 2.5 percent from the previous month, the biggest drop since August 2005, the Economy and Technology Ministry in Berlin said in a faxed statement today. Economists had forecast a drop of 0.9 percent from a month earlier, when they jumped 3.7 percent, according to the median of 36 estimates in a Bloomberg News survey.

Bloomberg also reports that services slowed across the euro zone.

Growth in European service industries from banking to telecommunications, the biggest part of the economy, unexpectedly slowed in October, a sign the region's expansion has peaked.

Royal Bank of Scotland Group Plc said today its services index fell to 56.5 in October, the fourth straight decline, from 56.7 in September. Economists expected an increase to 57, the median of 33 estimates in a Bloomberg News survey showed. A level above 50 indicates growth.

Yet another report from Bloomberg says that corporate profit margins are starting to shrink in Europe.

Analysts expect margins to decline next year for the first time since 2002 as economic growth slows, wages increase and borrowing costs climb, according to estimates compiled by FactSet Research Systems Inc. in London.

Some fund managers remain hopeful that stock prices will rise.

"Stocks could still go up as profitability comes down," said Arjan Palthe, a fund manager at ABN Amro Asset Management in Amsterdam, which manages $240 billion. "This is a peak level in profitability, but not on valuations."

Others are less so.

"If margins fall, we would have not only decelerating sales growth in terms of what is going on with the economy, but also shrinking profitability," said Franz Wenzel, senior strategist at Axa Investment Managers in Paris, which oversees $464 billion. "That would be a double whammy for European equities."

On the other hand, industrial producer prices in Europe did fall in September. From Eurostat:

The euro area industrial producer price index fell by 0.5% in September 2006 compared with August 2006, and EU25 prices decreased by 0.7%. In August prices gained 0.1% in the euro area and 0.2% in the EU25.

In September 2006 compared to September 2005, industrial producer prices rose by 4.6% in the euro area and by 5.0% in the EU25.