Photographer: Krisztian Bocsi/Bloomberg

Euro-Area Manufacturing Picks Up as Demand Drives Prices Higher

  • PMI increases to 55.2 in January, flash estimate 55.1
  • ‘Rhetoric at the ECB is likely to become more hawkish’

Euro-area manufacturing expanded at the strongest pace in nearly six years, with firm order growth signaling a build-up of underlying price pressures.

A Purchasing Managers’ Index climbed to 55.2 in January, IHS Markit said on Wednesday. The reading compares with a flash estimate of 55.1 and is up from 54.9 in December. A weaker euro and more expensive global commodities raised companies’ input costs, while high demand drove price growth to the fastest pace in five-and-a-half years.

With “signs of demand running ahead of supply,” there are hints of a “tentative build-up of core inflationary pressures,” said Chris Williamson, chief business economist at IHS Markit. “If current growth of manufacturing activity and the associated rise in prices is sustained, rhetoric at the ECB is likely to become more hawkish.”

The report follows data on Tuesday showing euro-area inflation accelerated to 1.8 percent last month, effectively reaching a level the European Central Bank defines as price stability. The pickup is unlikely to assuage concerns expressed by ECB President Mario Draghi that underlying cost pressures remain weak amid downside economic risks in a politically tumultuous year.

Manufacturing expanded at the fastest pace in Austria, the Netherlands and Germany. French industrial activity gathered pace, while Greece’s downturn worsened.

The 19-nation euro economy grew 0.5 percent in the final three months of 2016, the fastest pace in three quarters, and unemployment fell to the lowest since 2009. Economic confidence jumped to a six-year high in January.

“Euro-zone manufacturing is off to a strong start to the year,” said Williamson. “Optimism about the year ahead has risen to the highest since the region’s debt crisis, suggesting companies are maintaining a buoyant mood despite the heightened political uncertainty caused by Brexit and looming general elections.”

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