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Eurozone ‘two-speed’ economy sees services thrive, factories struggle

Eurozone businesses reported mixed pictures as the services sector reported an unexpected surge in growth, while manufacturing was hit by continuing supply chain constraints, according to a survey published on Friday.
S&P Global’s Flash Composite Purchasing Managers’ Index, regarded as a gauge of overall economic health, rose to 55.8 in April from 54.9 in March, beating expectations of a fall.

A reading above 50 indicates growth, and below that mark a contraction.

The services industry PMI rose to an eight-month high of 57.7 in April from 55.6 in March. Manufacturing woes were reflected in the factory PMI falling to a 16-month low of 55.3, from 56.5 in March, although it beat analysts’ forecast of 54.7.

“Common across both sectors, however, was a further surge in cost pressures, driven by soaring energy and raw material costs, as well as rising wages. Average prices charged for goods and services rose at an unprecedented rate in April as these higher costs were passed on to customers, sending a worrying signal that inflationary pressures continue to build,” S&P Global said.

Economic growth accelerated in April as a rebounding service sector, benefiting from loosened Covid-19 restrictions, helped compensate for a near stalling of manufacturing output, S&P Global said.

There was also an increase in staff hiring as business expectations for the year ahead lifted from a 17-month low in March.

However, confidence remained subdued by recent standards “as concerns over the Ukraine war, rising prices and the lingering effects of the pandemic continued to dampen optimism, especially in manufacturing”.

“April saw a two-speed euro zone economy. Manufacturing came close to stalling due to ongoing supply constraints, rising prices and signs of spending being hit by risk aversion due to the war,” said S&P Global chief business economist Chris Williamson,

“April also saw manufacturers suffer due to a shift in demand from goods to services amid looser pandemic restrictions, most notably via a record surge in spending on activities such as travel and recreation.”

Growth in demand for manufactured goods waned and the new orders index fell to 51.4 from 53.7, its lowest reading since around the time the pandemic was tightening its grip and indicating no imminent turnaround.

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

“Policymakers may nevertheless tilt to a more hawkish stance, reflecting the persistence of unprecedented inflationary pressures at a time of encouragingly robust economic growth.”

Williamson said the weakness of the manufacturing sector was a major concern “as it points to an economy that is not firing on all cylinders”.

“Similarly, the ever-rising cost of living suggests that service sector growth could cool sharply once the initial rebound from the opening up of the economy fades.”

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