Eurozone business activity rebounds much faster than expected

Business activity in the eurozone grew faster than expected in February, strengthening the rebound from last year’s energy crisis and reinforcing calls for the European Central Bank to keep raising interest rates to tackle high inflation.

S&P Global’s flash eurozone composite purchasing managers’ index, a measure of activity in manufacturing and services, rose to 52.3 from 50.3 in January, according to figures released on Tuesday.

The result was significantly higher than the 50.6 expected by economists polled by Reuters. It was also above the 50 mark for the second consecutive month, meaning a majority of businesses in the 20-country bloc reported increased activity.

“Business activity across the eurozone grew much faster than expected in February, with growth hitting a nine-month high thanks to resurgent service sector activity and a recovering manufacturing economy,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

The eurozone economy has proved more resilient than initially feared to the fallout from Russia’s invasion of Ukraine, with a mild winter helping to reduce natural gas consumption, lower fuel prices and allay fears of energy shortages.

Business activity is also recovering sharply in the UK, where the S&P Global/Cips UK composite purchasing managers’ index rose to an eight-month high of 53 in February, pointing to a milder recession than previously predicted.

The improving European outlook was mirrored in the monthly survey of investors by the ZEW Institute, which said its economic sentiment indicator for Germany outstripped expectations by rising 11.2 points to a 12-month high of 28.1 in February.

Signs that the region’s economy has weathered the worst of last year’s energy crisis without suffering a deep recession are likely to bolster expectations that price pressures will remain high for longer and increase calls for further rate rises by the ECB.

“With the labour market still very tight and price pressures strong, the surveys will reinforce ECB policymakers’ conviction that their tightening cycle still has some way to go,” said Jack Allen-Reynolds, economist at research group Capital Economics.

Since inflation soared last year, the central bank has raised rates by an unprecedented 3 percentage points and committed to a further half percentage point rise next month. Several policymakers have said recently that further monetary tightening is likely beyond that.

“With inflation so high, further rate hikes beyond March seem likely, logical and appropriate,” Olli Rehn, head of Finland’s central bank and a member of the ECB rate-setting governing council, told Börsen-Zeitung. “I assume that we will reach the terminal rate in the course of the summer.”

The PMI survey, based on responses collected between February 10 and 17, showed an increase in average selling prices, as companies passed on more of their higher costs to customers. S&P Global said this was “in part linked to the impact of higher wage costs,” although the rate slowed slightly from January.

Employment growth slowed even as businesses grew more confident about their prospects and supply bottlenecks eased further to reduce delivery times from suppliers.

There was a contrast between the improved outlook of services companies and a sharper-than-expected downturn in manufacturing, particularly in France. The PMI score for the services sector hit an eight-month high, while the reading for manufacturing fell to a two-month low.

There were also signs that lower inflation, which has fallen for three months since hitting a high of 10.6 per cent in October to reach 8.5 per cent in January, is providing some relief on input costs for industrial companies. German manufacturers reported their first decline in average input costs for more than two years. Input prices continued to accelerate in the services sector, however.

“Easing supply chain pressures, and a continued fall in energy prices, meant that input price inflation softened,” said Melanie Debono, economist at research group Pantheon Macroeconomics. “Still, firms raised their prices sharply again.”