Euro zone manufacturing loses momentum as supply shocks push costs to four-year high – Firstpost

The euro zone’s manufacturing recovery lost momentum in May as demand for goods stalled and supply-chain disruptions linked to the conflict in West Asia drove input costs to their highest level in four years, highlighting the growing challenge facing policymakers as inflationary pressures re-emerge.

The latest S&P Global Eurozone Manufacturing Purchasing Managers’ Index (PMI) eased to 51.6 in May from April’s near four-year high of 52.2. While the reading remained above the 50-mark that separates growth from contraction, it signalled a slowdown in the pace of expansion across the bloc’s factory sector.

The survey pointed to a manufacturing recovery that is increasingly being squeezed by rising costs and weakening demand, raising concerns that Europe’s industrial rebound may struggle to sustain momentum in the coming months.

“Although euro area manufacturers reported an expansion for a fourth successive month in May, the sector is showing signs of struggling under the weight of rising prices and supply disruptions emanating from the war in the Middle East,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Demand weakens after strong start

A key concern for manufacturers was the sudden loss of momentum in new orders. After recording their strongest increase in four years in April, new orders stagnated in May as customers pulled back on spending amid rising prices and economic uncertainty.

Export demand also weakened, with overseas orders declining and dragging down overall order books. The slowdown suggests that the recovery in global goods demand remains fragile despite signs of improvement earlier this year.

Factory output continued to expand but at a slower pace. The output index slipped to a four-month low of 51.3 from 52.3 in April, indicating that manufacturers are becoming more cautious as demand softens.

Employment conditions remained weak, with factory jobs continuing a decline that has now stretched for three years. Although business confidence about the year ahead remained positive, sentiment stayed below its long-term average.

Supply disruptions reignite inflation pressures

The most striking feature of the survey was the sharp rise in input costs, driven largely by higher energy prices and disruptions to supply chains.

Manufacturers reported the fastest increase in input costs since May 2022 as energy and raw material prices climbed. Supply delivery times also deteriorated at the quickest pace in nearly three years, reflecting growing logistical disruptions linked to tensions and conflict across West Asia.

To protect margins, companies raised selling prices at the fastest rate in three-and-a-half years, signalling that higher production costs are increasingly being passed on to consumers.

“Factories are having to pass higher costs on to customers, which will inevitably drive up inflation in the coming months. However, demand is being hit by higher prices, with May seeing order books stall after three successive monthly improvements,” Williamson said.

The findings add to concerns that Europe could face a renewed bout of inflation even as economic growth remains subdued — a combination that complicates the outlook for monetary policy.

ECB faces difficult balancing act

The survey arrives at a critical moment for the European Central Bank (ECB), which is expected to raise interest rates this month and potentially again later this year as it seeks to prevent higher energy costs from becoming embedded in broader inflation.

Euro zone inflation accelerated to 3 per cent in April, well above the ECB’s 2 per cent target, and economists expect price pressures to intensify further in the coming months.

At the same time, separate ECB survey data released on Monday offered some reassurance that consumers’ long-term inflation expectations remain relatively stable.

Households’ inflation expectations for the next year were unchanged at 4.0 per cent in April, while expectations for inflation three years ahead eased slightly to 2.9 per cent from 3.0 per cent. Five-year inflation expectations remained steady at 2.4 per cent.

The survey also suggested growing pessimism about the economy. Consumers now expect the euro zone economy to contract by 2.2 per cent over the next year and lowered their expectations for income growth.

For policymakers, the mixed signals underscore the challenge ahead. While rising energy costs and supply disruptions argue for tighter monetary policy, weakening demand and slowing manufacturing activity suggest that aggressive rate increases could further undermine growth.

Fresh euro zone inflation data due this week will provide a clearer indication of whether the region is heading towards another inflation surge or whether recent price pressures prove temporary.