Eurozone downturn eases but rising price pressures add to ECB worries
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The eurozone economy showed signs of a nascent recovery at the start of the year after a contraction in business activity eased slightly and price pressures intensified, according to a closely watched survey of companies.
S&P Global’s flash eurozone composite purchasing managers’ index, a measure of activity at businesses across the bloc, rose to a six-month high of 47.9, up from 47.6 a month earlier, after an improvement in manufacturing offset a deeper decline in services.
Economists polled by Reuters had forecast a bigger rise to 48. The eighth consecutive reading below the 50 mark that separates contraction from expansion indicates the eurozone remains stuck in a rut at the start of this year after stagnating for much of 2023.
Within the overall figures, a deeper downturn in French and German business activity offset an improvement in the rest of the single currency zone, which returned to modest growth.
The euro rose 0.4 per cent against the dollar taking it above $1.09, as investors judged the data reduced the chances of early rate cuts. But Germany’s benchmark 10-year bond yields dipped on signs of economic weakness.
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Purchasing managers added to hopes of a pick-up in the wider eurozone economy by reporting the smallest fall in new orders since last June, a slight increase in employment levels and a brightening in the overall outlook for the year ahead.
Attacks by Houthi rebels on commercial ships in the Red Sea have disrupted global supply chains, causing manufacturers’ delivery times to lengthen for the first time in a year, S&P Global said. But it added: “Manufacturing input costs continued to fall on average.”
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The data is likely to shape discussions at this week’s meeting of the European Central Bank, which is expected to leave monetary policy unchanged and rebuff market expectations of an interest-rate cut at its next meeting in March.
Businesses reported the steepest rise in selling prices since last May, mainly because of higher labour costs as wages rise, S&P said. This is likely to worry ECB officials about the risk of persistent inflation that is already making them wary of cutting interest rates too early.
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Tomasz Wieladek, an economist at investor T Rowe Price, said increased hiring and falling output in the services sector would lower productivity and raise price pressures. “I therefore expect the ECB to continue to push back on market pricing of so many [rate] cuts later in the year,” he added.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which sponsors the survey, said it showed “a widespread easing of the downward trajectory witnessed in the past year”. But he added: “Companies have faced higher input prices and were able to pass them through to their customers.”