Euro-Area Factories' Slower Pace Hints That Growth Is Peaking

Updated on
  • Manufacturing PMI falls to 58.6, less than initially estimated
  • IHS Markit sees momentum damped by weaker export orders

Goncalves, Abramowicz on a Slowdown in Euro-Area Inflation

Euro-area factories maintained their robust pace of output last month, but there are mounting signs that growth momentum may have reached its limit.

The Purchasing Managers’ Index for manufacturing fell for a second month in February, and its decline since the end of 2017 has been the steepest in two years. A slowdown in export orders to the weakest in almost a year means growth could cool further, IHS Markit said on Thursday.

The reading is one of a cluster in the past week suggesting exuberance in economic activity and trade may be cooling off even as euro-area and global growth remains solid. Economic confidence in the region has slipped to a four-month low, Chinese manufacturing is barely growing and Japanese factory activity cooled in February.

“We’ve probably seen a peak in growth rates,” said Florian Hense, European economist at Berenberg in London. “We shouldn’t see a considerable slowdown, but rather a moderation throughout the year.”

Another report showed Spanish consumers tightened their belts at the end of 2017 and export growth cooled sharply, though the overall expansion of euro area’s fourth-largest economy was unrevised at 0.7 percent in the fourth quarter.

U.K. manufacturing also lost a bit of steam in February, with growth slipping to an eight-month low. Markit said its figures suggest a “marked downshift” in the pace of growth so far this year.

For now, the picture in the euro area is still one of growth, and the decline in the PMI last month was less than initially estimated. At 58.6, the measure is also well above its five-year average.

The region’s largest economies are seeing solid rates of expansion and even Greece is catching up, with data hinting at the fastest factory growth in 18 years. A separate report showed euro-area unemployment continued its slow healing at the start of 2018 with the rate at 8.6 percent.

Still, the European Central Bank isn’t rushing to remove stimulus with inflation lower than it would like. That could change as businesses run into capacity constraints and respond to an increasingly tight labor market with higher wages.

“Skill shortages are being increasingly reported and supply chains are being stretched to one of the greatest extents on record,” said Chris Williamson, chief business economist at IHS Markit. “Widespread cases of demand exceeding supply highlight the ongoing presence of solid underlying core inflationary pressures.”

— With assistance by Mark Evans

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