Activity at eurozone businesses has expanded at the fastest pace for more than three years, boosting order books and job creation but also creating widespread capacity constraints and driving up prices, according to a closely watched survey.
IHS Markit’s eurozone flash purchasing managers’ index rose to 56.9 in May, up from 53.8 in April and the highest reading since February 2018. It overshot the consensus expectations of economists who had predicted a reading of 55.1, according to a poll by Reuters. A reading of over 50 indicates a majority of businesses reported an expansion of activity.
The improvement suggests that Europe’s economy is building momentum in its recovery from the pandemic and the lockdown measures to contain it.
“Demand for goods and services is surging at the sharpest rate for 15 years across the eurozone as the region continues to reopen from Covid-related restrictions,” said Chris Williamson, chief business economist at IHS Markit.
The survey found several signs that the rebound in activity is creating capacity constraints and disrupting supply chains. French companies said they had struggled to hire enough staff to meet demand, while German companies reported “severe supply chain bottlenecks” and the fastest rise in output prices since records began in 1997, IHS Markit said.
New order growth was the highest since 2006, while backlogs of uncompleted orders rose at the fastest pace since records began in 2002. Factory gate prices surged at the fastest rate on record and prices for services rose more modestly, but still had the biggest increase for two years.
“This imbalance of supply and demand has put further upward pressure on prices,” said Williamson. “How long these inflationary pressures persist will depend on how quickly supply comes back into line with demand.”
Christoph Weil, economist at Commerzbank, said: “Even though the correlation between producer and consumer prices is not particularly close and the weight of industrial goods excluding energy in the consumer basket is only about a quarter, it can be assumed that this will also slightly strengthen the underlying upward price trend in the euro area in the medium term.”
The eurozone economy sank into a double-dip recession in the six months to March, lagging the US and Chinese economies’ recoveries. But the latest PMI reading signals the 19-country single currency zone is likely to return to growth in the second quarter, boosted by an acceleration of vaccinations and a steady easing of restrictions on travel and social interaction.
Most German regions have recently lifted curfews and let non-essential stores reopen, France has reopened outdoor dining and Italy has scrapped the requirement for visitors from many European countries to quarantine if they have tested negative for Covid-19.
“Today’s data suggest that the eurozone economy is continuing to recover as restrictions are eased and point to decent gross domestic product growth in the second quarter,” said Jessica Hinds, economist at Capital Economics. “Although price pressures continue to build, there is still little evidence of a more sustained rise in underlying inflation.”
The PMI for the eurozone’s services sector, which makes up three-quarters of the bloc’s economy and has been hit hardest by containment measures, rose to a three-year high of 55.1. The equivalent index for manufacturing dipped slightly from an all-time high to 62.8.
The French composite PMI reading of 57 comfortably exceeded economists’ expectations, reflecting the country’s earlier lifting of restrictions in contrast to neighbouring Germany, where the PMI reading slightly undershot expectations despite rising to 56.2.
The flash PMIs are published about 10 days before the final ones and are based on around 85 per cent of total responses.
Source: Economy - ft.com
