Eurozone economic slump eases, but upward pressure on prices increases ECB concerns

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The eurozone economy showed early signs of recovery at the start of the year as business activity eased slightly and price pressures strengthened, according to a closely watched business survey.

S&P Global's Eurozone Composite Purchasing Managers' Business Index (preliminary), an indicator of business activity across the eurozone, rose to 47.6 from the previous month as improvements in the manufacturing industry offset a sharp decline in the services industry. The index rose to 47.9, the highest level in six months.

Economists polled by Reuters expected an even bigger rise, at 48. The eighth consecutive dip below 50, the dividing line between contraction and expansion, shows the eurozone is stuck in a rut earlier this year after being stagnant for much of 2023.

Within the overall figures, a severe downturn in business activity in France and Germany offset improvements in the rest of the single currency area, which returned to moderate growth.

The euro rose 0.4% against the dollar to above $1.09 as investors judged the statistics to reduce the chances of an early interest rate cut. However, Germany's benchmark 10-year bond yield fell on signs of economic weakness.

Purchasing managers reported the smallest decline in new orders since June last year, a slight rise in employment levels and a brighter overall outlook for the year ahead. He raised hopes for recovery.

According to S&P Global, attacks on commercial ships by Houthi rebels in the Red Sea have disrupted global supply chains, causing manufacturers to take longer delivery times for the first time in a year. However, it added that “manufacturing input costs continued to decline on average.”

The data is likely to shape discussions at this week's European Central Bank board meeting, where the bank is expected to keep monetary policy on hold and quash market expectations for a rate cut at its next meeting in March.

According to S&P, companies reported the largest increase in selling prices since May last year, mainly due to higher labor costs due to higher wages. As a result, ECB officials are already wary of cutting interest rates early, as they are concerned about the risk of prolonged inflation.

Tomasz Wiladek, an economist at investment firm T. Rowe Price, said rising employment and lower output in the service sector will reduce productivity and increase price pressure. “Therefore, I expect the ECB to continue to depress market pricing for a significant number of financial instruments.” [rate] It will be reduced later this year,” he added.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which organizes the survey, said the survey showed “a broad moderation of the downward trajectory seen over the past year.” But, he added, “companies have faced higher input prices and have been able to pass them on to customers.”