Eurozone economic slump eases despite decline in German factories, survey finds

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The downturn in the euro zone's beleaguered economies is easing, with stabilizing activity in services firms offsetting a steep decline in manufacturing, particularly in Germany, a closely tracked business survey found. .

S&P Global's Eurozone Composite Purchasing Managers Index, which measures business activity across the eurozone, rose to 48.9 this month, an eight-month high, up from 47.9 in January. Economists polled by Reuters had forecast a slight increase of 48.5.

In the overall figures, the contraction in business activity in Germany appears to have become even more severe, with the country suffering its biggest drop in demand in four months.

But while the rest of the eurozone continued to achieve moderate growth, orders in France fell at the slowest pace since May last year, showing signs that the economic slump was shallowing.

Norman Liebke, an economist at the Commercial Bank of Hamburg, which organizes the survey, said, “We are gradually seeing glimmers of hope for the eurozone's recovery,'' adding that Germany is “acting as a brake on eurozone growth.'' ” he warned.

Purchasing managers reported that the decline in new orders eased for the fourth straight month, employment rose and the overall outlook for next year improved, raising hopes for a recovery across the eurozone economy.

But nine consecutive times below 50, the dividing line between expansion and contraction, means the eurozone economy is likely to see tepid growth at best early this year, after being stagnant for much of 2023. Showing.

“The main message is that the economy remains generally stagnant,” said Andrew Kenningham, an economist at consultancy Capital Economics, but the study found that “the region is in a long-term recession. It also suggests that the near-term situation is easing.

Companies reported the largest increase in selling prices since May last year, mainly due to higher labor costs due to higher wages. That could worry European Central Bank officials, who may be wary of cutting borrowing costs too soon, worried about the risk of prolonged inflation.

Tomasz Wiladek, an economist at investment firm T. Rowe Price, said “these data would support the hawkish stance” on the ECB. “The first risk is [interest rate] This year's rate cuts have been delayed since June and are clearly on the rise.”

The yield on two-year German bunds, an interest rate-sensitive euro zone benchmark, rose 0.05 percentage point to 2.91%, its highest level since November, as investors reduced bets on the timing of rate cuts this year. It became.

ECB rate-setters at their last meeting in January warned that although growth risks were “tilted to the downside,” the risk of cutting rates too soon was too high, according to an official report of the discussions. It was generally agreed that the risks outweighed the risks. on Thursday.

The ECB said it would be forced to change course, but it could come with high reputational costs if economic activity recovers more strongly than expected, wage growth accelerates or new inflationary pressures emerge. “There is,” he said.

Inflation in the euro zone “declined faster than expected” to 2.8% in January, the ECB said, down from a record high of 10.6% in 2022. However, it added: “The disinflationary process remains fragile and easing too soon could undo some of the progress made.”

S&P said PMI data showed delivery times for euro zone manufacturers were shortened as weak demand “strained supply chains” despite transport disruptions caused by the Red Sea crisis. Factory input prices continued to fall, suggesting the disruption caused by attacks on ships by Yemen's Houthi rebels is not causing major problems for European companies.

The euro zone economy flatlined in the final quarter of last year, dragged down by a decline in German production. Most economists expect a similar weak performance at the start of the year, but many expect regional economic growth to accelerate by the end of the year as inflation continues to fall and interest rates begin to be cut. There is.