Booming factories and resurgent retail fuel hopes for eurozone recovery

Eurozone factories are increasing production at a record rate to meet surging global demand, while German retail sales have rebounded more than expected, fuelling hopes that the region’s pandemic-stricken economy is poised for a powerful recovery.

The eurozone slid into a double-dip recession in the first three months of this year as output dropped 0.6 per cent under the weight of coronavirus lockdown measures, leaving the bloc lagging behind other major economies. But strong manufacturing outlook, detailed in purchasing managers’ index data from IHS Markit on Monday, underlined that trade and consumer demand was recovering fast.

IHS Markit said its final PMI readings for the eurozone manufacturing sector rose to the highest level since records began in 1997, climbing to 62.9 in April, well above the 50 mark that indicates a majority of businesses reporting an expansion.

“Eurozone manufacturing is booming,” said Chris Williamson, chief business economist at IHS Markit, adding that demand had returned so quickly there were shortages of many products. “Supply constraints are also running at unprecedented levels, leading to a record build-up of uncompleted orders at factories.”

Line chart showing Europe's factories are booming on global trade rebound

In response to global supply chain disruption, which has sent the price of many goods from semiconductors to timber soaring in recent months, eurozone manufacturers ate into their inventories at the fastest rate since December 2009, according to IHS Markit data.

Confidence among eurozone manufacturers rose to its highest level in nine years, even though they reported growing supply chain problems, which pushed up prices of many goods including chemicals, electronics, metals, plastics and paper. In response, factories raised their own prices at the fastest pace for more than two decades.

The manufacturing PMI for Italy, the eurozone’s second-largest manufacturing economy after Germany, rose to an all-time high of 60.7. Spain’s manufacturing PMI rose to 57.7, its highest level for 21 years, driven by the sharpest rise in new orders for over four years. 

Separately, German retail sales in March increased 7.7 per cent from February, more than double the expected growth rate after a partial lifting of coronavirus restrictions in the country. The rise meant German retail sales have recovered about two-thirds since falling when a second lockdown was imposed in the country in December, although restrictions have been tightened again recently.

Ralph Solveen, senior economist at Commerzbank, said the rise in German retail sales was “certainly due to the loosening of restrictions, showing once again how quickly economic activity picks up after a relaxation of restrictions”. Some of those restrictions were tightened again in Germany last month but Solveen said he remained optimistic. “After a probable slight setback in April, the trend in retail trade should continue to point upwards.”

The accelerating pace of vaccinations across Europe and signs that infections may have peaked are fuelling economists’ hopes that lockdown measures could start being relaxed across the bloc this month, sparking a consumer-driven rebound in the second quarter.

“The experience of the manufacturing sector points to a strong, even overshooting, recovery, which triggers price pressures as firms struggle to ramp up supply as fast as demand,” economists at Citigroup said in a report on the eurozone.

“If replicated at the whole economy level, this could be an environment, which triggers enough hiring and investment to become a self-sustained recovery,” they said.

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