Eurozone manufacturing maintains momentum in February

The IHS Markit eurozone manufacturing purchasing managers’ index (PMI) came in at 58.2 in February, slightly weaker than the flash estimate for 58.4 and down from January’s final reading of 58.7.

It was still comfortably above the 50-point level that separates expansion from contraction, however.

IHS Markit said demand for eurozone goods rose at its fastest rate since last August, while the lengthening of supplier delivery times was at its weakest level for over a year, although inflation remained an issue.

“Don’t let the drop in the headline PMI distract from what should be viewed as a largely positive month for the euro area manufacturing sector in February,” said Joe Hayes, senior economist at IHS Markit.

“Demand for goods is trending higher, with the rate of expansion accelerating to a six-month high.

“Underlying sales conditions are clearly strengthening as Europe overcomes the Omicron wave of Covid-19 and businesses step up their recovery efforts.”

Hayes said another positive move was in the delivery times gauge, which moved up during February to its highest since the beginning of last year – signalling the “least marked deterioration” in vendor performance since then.

“It was actually this move that pulled the headline PMI lower, but tentative signs of stabilisation across supply chains is a good thing because it will help production capacities increase and is what we need to see for inflation to cool.

“Inflation is still running extremely hot, however, and price setters clearly carry substantial pricing power still.

“Strong demand for inputs, coupled with scarce supply, continues to drive vendor prices higher. In turn, firms are passing higher costs on to their clients.

“Although there was some welcome easing in input cost and output price inflation rates in February, they are both still among the fastest ever seen.”

By nation, it was the Netherlands that saw the strongest improvement in manufacturing conditions during February, followed by “equally-sharp” expansions in Germany and Austria.

IHS Markit said Italy, Ireland and Greece also registered strong rates of growth, despite slowdowns in the latter two.

Spain was the weakest-growing of the monitored euro area nations, followed by France.

“Now, the Russia-Ukraine situation, which also carries the risk of dampening growth, adds fresh fuel to inflation risks, and we’ve seen Brent crude already moving higher in response,” Joe Hayes added.

“It’s going to take prudent macroeconomic policy management to re-anchor inflation expectations without denting the demand recovery too heavily.”

Maddalena Martini at Oxford Economics said the eurozone manufacturing sector proved “solid” in February, ahead of possible further disruptions related to the current Ukraine crisis.

“Despite supply bottlenecks having just started to ease, challenges arise in the sector and are not fully incorporated in the surveys,” Martini noted.

“Indeed, soaring energy prices are likely to put further pressures on input and output inflation, and to weigh on client demand and firms' confidence.

“Looking forward, we expect risks to remain tilted to the downside; disruptions to industrial activity can amplify supply bottlenecks as Russia and Ukraine are partially integrated in the European industry’s supply chain.”