Eurozone April private sector activity momentum accelerates despite weaker manufacturing

LONDON (ICIS)–Eurozone private sector activity continued to thaw in April, moving further into growth territory as a resurgent service sector offset a manufacturing industry sinking deeper into contraction.

• North-south divide eases as Germany, France condition improve
• Manufacturing sector weakens in eurozone, UK
• Input cost inflation likely to pressure European Central Bank

The eurozone composite purchasing managers’ index (PMI) for the month firmed to 51.4, a substantial increase from 50.3 in March and the highest level in nearly a year, as the bloc continued to gradually lift out of a protracted downturn. A PMI score of above 50.0 signifies growth.

The north-south divide that has characterised recent months, with Mediterranean nations firming while Germany and France remained mired in contraction, eased during the month, with more-broad-based momentum among key economies.

Germany returned to growth during the month, while France came close to stabilising, according to PMI data provider S&P Global.

Momentum also continued to build for the UK economy, which hit an 11-month high of 54.0, despite the manufacturing sector slipping back into recessionary territory at 49.1, with momentum also sinking for producers in the eurozone.

At 45.6, the eurozone manufacturing sector PMI reading represented a four-month low and the 13th consecutive month of contraction, although the industry outlook was buoyed by signals of firmer demand driven by the global inventory cycle.

Price pressures intensified slightly during the month as average input costs across the goods and services sector saw the fastest combined increase over the past year after cooling in March. Despite manufacturing sector input pricing remaining on contraction footing, the decline was the smallest in 14 months.

Higher cost and sales price inflation is likely to be noted by the European Central Bank’s monetary policy committee, according to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which helps to assemble the eurozone PMI dat.

Odds are still strong for the first interest rate cuts to fall in  June, he added, but the price increases are likely to present a stronger challenge to the decision, and potentially slow the cadence of additional reductions.

“The PMI figures are poised to test the ECB’s willingness to cut interest rates in June. Accelerated increases in input costs, likely driven not only by higher oil prices but also, more concerningly, by higher wages, are a cause for scrutiny,” he said.

“Concurrently, service sector companies have raised their prices at a faster rate than in March, fuelling expectations that services inflation will persist. Despite these factors, we expect the ECB to cut rates in June. However, we… expect a more cautious approach,” he added.

Consultancy Oxford Economics also expects the first rate cut to come in June despite the growing evidence of stronger upward pressure on inflation.

“The increase in output prices remains above its long-term average, driven by the services sector, but we do not think sticky services prices will prevent the ECB from cutting rates in June,” said Oxford senior economist Leo Barincou.

Despite the ongoing disruption in the Red Sea, supply chains continued to tighten, with manufacturing supplier delivery times falling for the third consecutive month as a result of fewer shipping delays. A steep reduction in input purchases by eurozone manufacturers also eased pressure on logistics.

Early second-quarter conditions point so far to a 0.3% expansion in eurozone GDP and a 0.4% uptick in for the UK compared to the first three months of the year, according to the data.

Focus article by Tom Brown.

Thumbnail photo: A statue of a bull outside the Amsterdam Stock Exchange, Netherlands (Source: Hollandse Hoogte/Shutterstock)