Private sector economic activity in Europe recovered strongly in April, driven by solid demand for services, despite continued contraction in manufacturing. However, the resumption of inflationary pressures has created uncertainty over the speed of the ECB's interest rate cuts.
advertisementEuropean private sector economic activity showed a strong recovery in April on the back of solid demand for services. However, some inflationary pressures do not appear to have completely resolved, and there remains uncertainty over the speed at which the European Central Bank (ECB) will return to its 2% target.
S&P Global's Purchasing Managers Index (PMI) preliminary survey released on Tuesday continued to show strong growth in the services sector across major European economies, alongside persistent challenges in manufacturing activity.
Below is a visual depiction of the latest trends in private sector activity research for the euro area, Germany and France.
Growth hits 11-month high, but price pressures rise again
The Eurozone composite PMI production index rose from 50.3 to 51.4 in April, the highest level in 11 months.
The services PMI rose from 51.5 to 52.9, above the expected 51.8, while the manufacturing PMI fell from 46.1 to 45.6, below the expected 46.5.
“The euro area got off to a strong start in the second quarter,” said Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
He highlighted that positive trends in new business over the past two months have led to a more proactive attitude towards hiring. He further pointed out that the increase in output prices not only reflects the accelerating rise in input costs, but also reflects confidence in service providers' pricing strategies.
This month's economic recovery has been most pronounced in the euro zone's two largest economies, Germany and France.
However, Dell'Albia warned that “the PMI numbers are poised to test the ECB's willingness to cut rates in June”.
The economist said the accelerating rise in input costs, likely due to both higher oil prices and especially higher wages, is causing concern. Meanwhile, companies in the services sector have accelerated price increases, indicating that services inflation may persist.
Despite these challenges, he still expects the ECB to cut rates in June, although he doubts it will do so as quickly as some officials have recently suggested.
German economy shows growth in April
Germany's private sector returned to growth in April, with the composite PMI production index rising to 50.5 from 47.7 in March, its highest level in 10 months.
The services sector showed a notable rise to 53.3, beating economists' expectations of 50.6 and reaching its highest level since June 2023.
However, manufacturing production continued to contract, albeit at a slower pace, rising slightly from 41.9 to 42.2, falling short of the expected 42.8. On the price front, input cost inflation rose from a three-month low in March and was broadly in line with the historical series average.
“Is the recession over? The answer is not simple. First of all, the recession seems to have been mainly concentrated in manufacturing, but the (German) economy as a whole has narrowly avoided such a recession. “It's possible,” said Dr. Cyrus de la Rubia. .
He added that the services sector accounts for about two-thirds of gross domestic product and could act as a catalyst for the overall economy, suggesting the possibility of a more stable and sustained recovery. I commented that there is.
French economy stabilizes in April
France's composite PMI rose to 49.9 from 48.3, its highest level in almost a year, indicating stabilization in broader economic conditions.
Nevertheless, while services activity recovered and the PMI rose to 50.5, beating expectations of 48.9 and marking the first growth since May 2023, the contraction in the manufacturing sector deepened. The manufacturing PMI fell to 44.9, significantly lower than the expected 48.9.
advertisementFactory orders in France fell by the most since January, following reports of weaker demand from customers in international markets.
“The service sector is the mainstay of the economy,'' said Norman Liebke, an economist at Hamburg Commercial Bank, underscoring the vital role of the service sector.
However, price pressures have accelerated again due to increases in wages, energy costs, and oil prices. Manufacturing industry operating expenses surged at the fastest pace since February 2023.
