Charting the Global Economy: Euro Area Business Activity Sags

Eurozone business activity shrinks as German manufacturing contracts for sixth month

James Okafor | GlobalBeat

Euro area private sector output fell in April for the first time this year as factory orders dried up across the currency bloc’s largest economy.

The HCOB purchasing managers’ index dropped to 49.9 from 51.4 in March according to data compiled by S&P Global published Tuesday. Any reading below 50 indicates contraction.

Manufacturing led the decline with Germany posting its sharpest production drop since October. Orders fell at their fastest pace in six months across the 20-nation eurozone while employment growth slowed to levels last seen during the early pandemic.

German factories bore the brunt. The country’s manufacturing PMI slid to 42.5 from 44.7 making April the sixth straight month of shrinking output. France managed slight improvement at 46.6 versus March’s 45.8 but remained mired in contraction.

“The industrial downturn is gathering pace again,” Cyrus de la Rubia told reporters. The Hamburg Commercial Bank economist blamed weak export markets and inventory gluts after firms overbuilt during last year’s brief recovery.

Service providers offered little relief. The sector index dipped to 51.8 from 52.3 as consumers pulled back on discretionary spending. Restaurants reported weaker bookings while retailers saw foot traffic decline from March levels.

Input costs accelerated for the first time in five months. Companies blamed energy prices and wage settlements struck during the winter bargaining rounds. Brent crude averaged $86 per barrel in April compared with $78 in March.

The data landed two days after European Central Bank President Christine Lagarde said officials needed “further evidence” that inflation would return sustainably to their 2 percent goal before cutting borrowing costs. Markets had bet on a June reduction.

ING economist Carsten Brzeski called the figures “a rude awakening” for policymakers banking on manufacturing-led growth. “The hoped-for rotation from services to industry isn’t happening,” he wrote in a note to clients.

Italian output surprised somewhat with PMI holding steady at 47.3. Milan’s stock index briefly turned positive on the reading before giving up gains. Spanish data showed modest expansion at 52.1 though down from March’s 55.3.

Employment across the eurozone grew at the slowest pace since February 2021. Manufacturers cut headcount for an eighth consecutive month while service providers added staff at just half the rate seen during 2023’s first quarter.

Supply chain pressures eased slightly. Delivery times shortened for the third straight survey though remained longer than historical averages. Container shipping rates from Asia dropped 15 percent during April.

Background

The eurozone has struggled to regain momentum since Russia’s invasion of Ukraine sent energy prices soaring in 2022. Manufacturing bore the brunt as factories shuttered production lines when gas prices spiked above €300 per megawatt hour.

An unusually mild winter allowed Europe to avoid the worst-case rationing scenarios. Industrial output actually grew 0.7 percent in January from December according to Eurostat data suggesting green shoots might emerge.

Those hopes dimmed as demand failed to materialise. Chinese buyers retreated amid their domestic property crisis while American consumers shifted spending toward services and away from imported goods Europe typically produces.

What’s Next

Next week brings German Ifo business sentiment data and the ECB’s latest bank lending survey. Both will shape June’s rate decision where markets still price roughly 70 percent odds of a 25 basis point cut despite Tuesday’s numbers.

Political developments in June’s European Parliament elections could complicate fiscal arithmetic. Far-right parties pushing tax cuts threaten to loosen budgets just as growth disappointments hit revenue projections.

The bloc now faces renewed questions about its growth model. Germany’s export machine sputters while France struggles with competitiveness gaps. Italy’s slight outperformance offers little comfort given its heavy debt burden approaching 140 percent of GDP.

Whether this represents another growth scare or the start of something more fundamental depends on whether Chinese demand recovers and American consumers keep spending through election season. Neither looks assured from Frankfurt’s perspective.