By Nigel Davies
LONDON, Feb 2 (Reuters) - Euro zone manufacturing business shrank at a slightly slower pace in January while factory prices tumbled at their fastest rate in at least six years, a survey showed on Monday, leaving scope for further ECB rate cuts.
The survey of around 3,000 manufacturers showed only Germany among the euro zone's leading four economies registered a deeper contraction in January. France, Italy, and Spain all saw some slowing in the pace of decline.
The Markit Eurozone Manufacturing purchasing managers' index for January rose to 34.4 from 33.9 in December, the eighth month in a row the index has been below the 50.0 mark that separates growth from contraction.
That was slightly below the 34.5 flash reading released late last month and as forecast by economists, but suggested that the sector may have found a floor in the fourth quarter of last year.
A fragile outlook for the economy, coupled with the sharp fall in inflationary pressures, will provide more leeway for the European Central Bank to cut rates by March as is widely expected.
"The first upturn in the PMI since the collapse of Lehmans will fuel hope that the rate of contraction may have peaked in December," said Chris Williamson, chief economist at Markit, the data provider.
"However, the situation clearly remains dire, with the data consistent with industrial production falling at an annual rate of over 10 percent, which induced a record rate of job losses as firms scaled back their operating capacity," he added.
PRICES FALLING
Manufacturers across the euro zone are struggling with waning global demand. Leading German steel maker ThyssenKrupp recently said it would not rule out making further output cuts, shortening work hours, and job cuts as the recession tore into the country's manufacturing sector.
The PMI also showed companies' costs falling at their fastest pace in the near 12-year survey history. The sub-index slipped to 30.1 from 32.8.
But companies found it increasingly hard to pass on costs reflecting weaker demand taking the output price index, which began in November 2002, to a record low too.
Official inflation in the euro zone fell to 1.1 percent in January, well below the ECB's target of close but below 2 percent.
The PMI showed new orders and export orders contracting at a slightly slower pace than the record contractions registered in the previous month.
However, employment in the sector fell at the fastest pace in the survey's history, with that index down slightly further even than the record flash reading.
The euro zone's official unemployment rate rose in December to 8.0 percent, its highest level since late 2006, and German unemployment saw its biggest increase in nearly four years in January.
(Editing by Ruth Pitchford)