Eurozone economy at two speeds while services shine, factories struggle

An employee with a protective mask works in a Valeo factory in Etaples near Le Touquet, France.

Ludovic Marin | Pool via Reuters

Business growth in the euro zone has accelerated unexpectedly this month, with the bloc’s dominant services sector seeing a sharp rise in activity as consumers have been put off by rising prices, a survey showed.

Manufacturers have struggled, however, as supply chain disruptions caused by the pandemic were exacerbated by Russia’s invasion of Ukraine and renewed lockdowns in China.

S&P Global’s Flash Composite Purchasing Managers’ Index, seen as a good indicator of overall economic health, rose to 55.8 in April from 54.9 in March, beating expectations in a Reuters poll that it would rise to 53 .9 would fall.

Any value above 50 indicates growth.

“In April, the Eurozone economy experienced two speeds. Production nearly stalled on continued supply constraints, rising prices and signs that war-related risk aversion was hurting spending,” said Chris Williamson, chief operating officer at S&P Global.

“In April, manufacturers also suffered from a shift in demand from goods to services amid looser pandemic restrictions, particularly through a record surge in spending on activities like travel and recreation.”

A PMI for the services industry rose to an eight-month high of 57.7 in April from 55.6 in March. The median forecast in a Reuters poll was for a drop to 55.0.

However, the factory PMI fell to a 16-month low of 55.3 from 56.5 in March, although it beat analysts’ forecast of 54.7. An index reading that feeds into the composite PMI fell to 50.4 from 53.1.

Demand growth for manufactured goods slowed and the new orders index fell to 51.4 from 53.7, the lowest since around the time the pandemic was tightening its grip and showing no impending turnaround.

Conversely, despite rising prices, demand for services increased as economies increasingly reopened and life returned to a sense of normality. The new business index rose to 56.4 from 54.2 in the previous month.

Inflation on the bloc was 7.5% last month, nearly four times the European Central Bank’s target of 2%, and the latest PMI survey suggests it needs to rise further. The composite producer price index hit a record high of 68.5 versus 65.7.

The ECB last week confirmed plans to end its signature stimulus program in the third quarter, and another Reuters poll suggested the bank is likely to hike its deposit rate by the end of the year.

“The ever-rising cost of living suggests that service sector growth could slow sharply once the initial recovery from the opening up of the economy fades,” Williamson said.

“Policymakers may nevertheless be leaning towards a more hawkish stance, reflecting the persistence of unprecedented inflationary pressures at a time of encouragingly robust economic growth.” Eurozone economy at two speeds while services shine, factories struggle

Chrissy Callahan

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