German manufacturing returns to contraction in March - PMI

BERLIN (Reuters) - Germany's manufacturing sector shrank slightly in March, hit by a fall in new orders, a survey showed on Tuesday, raising doubts about the strength of a first-quarter recovery in Europe's largest economy.

Markit's Purchasing Managers' Index (PMI) for the German manufacturing sector, which accounts for around one-fifth of the German economy, fell to 49.0 in March from 50.3 in February, when it grew for the first time in a year.

Although that marked a tiny rise from an initial reading of 48.9 reported in mid-March, the final figure was the weakest in three months and was below the 50 line that separates growth from contraction. It was also well short of the long-run average of 51.9.

The first fall in new work this year was largely to blame for the decline, though new orders fell much more slowly than they did throughout 2012. Factories took on fewer new contracts from abroad, following a robust rise in these orders in February.

Survey participants said demand was weak from southern Europe, where many countries are in recession and face tough austerity measures. But some factories said appetite among Asian and North American clients remained solid, limiting the decline in new export orders.

"Manufacturers cited heightened uncertainty about the economic outlook, especially across export markets within the euro area, as having curtailed client spending," said Tim Moore, senior economist at Markit.

Some German firms are looking to markets beyond Europe for growth as the euro zone crisis weighs on demand closer to home.

HeidelbergCement has said it expects operating income to grow this year due to stronger demand from North America, Asia and Africa. Volkswagen plans to almost double production capacity in China over the next five years to grab a bigger slice of fast-growing emerging markets.

Output, which rose for the first two months of 2013, stagnated in March as factories took on fewer new orders. Manufacturers also purchased fewer goods, boding ill for future production.

"Production volumes stalled in March, contrasting with moderate growth seen in the first two months of 2013, while downward inventory adjustments continued amid signs of softer demand ahead," Moore said.

But the survey did contain some bright spots. Staffing levels in the sector increased marginally for the first time in six months due to higher backlogs of work and long-term plans for expansion.

Input prices fell for the fourth consecutive month, while output prices rose for the second straight month, reducing the pressure on firms' operating margins.

The German economy put in a solid performance during the first 2-1/2 years of the euro zone crisis but growth weakened last year as exports and investment slowed, resulting in a 0.6 percent contraction in the fourth quarter.

Most economists expect Germany to grow moderately again in the first quarter. That view is supported by sentiment indicators, which have generally improved this year, though a dip in the Ifo business climate index for March and a mixed bag of hard data have raised doubts.

Industrial orders have fallen due to weaker euro zone demand, output has stalled while exports, retail sales and unemployment have all risen.

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(Reporting by Michelle Martin, editing by Gareth Jones and Hugh Lawson)