Eco Pulse

Eurozone | Activity holds up well despite the troubles in industry


If there could still be any doubt, Philip Lane's latest statements will, on the face of it, confirm a first cut in the ECB’s policy rates at the next monetary policy meeting on 6 June.[1] The current trend in euro-zone inflation is giving space for the ECB to initiate monetary easing, even though new upward pressure on prices are emerging. Inflation fell marginally in April from 2.43% y/y to 2.37% y/y, while core inflation decreased more sharply from 2.95% y/y to 2.66% y/y. The likely return of a positive contribution from the energy component in May (after twelve months in negative territory), an upward momentum in services prices (the 3m/3m annualised rate rose back above 5%) and annual growth in negotiated wages, which were on the rise once again in Q1 (4.7%), are expected to stifle inflation landing at around 2% this year.

Even though the results varied slightly in April, industry confidence surveys are still pessimistic. The manufacturing PMI rose from 1.7 points to 47.4, thanks to a noticeable improvement in the output (+2.3 points, to 49.6) and new orders (+3.4 points, to 47.5) indices. This pushed the composite PMI index higher (+0.6 points, to 52.3), while the services PMI remained stable at 53.3. Conversely, the business climate index in industry, as measured by the European Commission, hit its lowest level seen since July 2020, the worst result since the start of the war in Ukraine. However, household confidence in the euro zone has continued to improve, thanks in particular to an improvement in major purchase intentions.

The difficulties in the industrial sector are not, for the time being, damaging the positive dynamics in the eurozone labour market. The number of jobseekers fell by 94,000 in March, to the lowest level in 25 years of the currency block. The unemployment rate was stable at 6.5%. The first national results for April (lower unemployment in France and Spain, slight increase in Germany) are still positive, given the current climate.

Our Nowcast also indicates strengthening activity in Q2 compared to Q1, with estimated growth of 0.4% q/q after +0.3% q/q in Q1, while our own forecast was expecting the same rate as in Q1. We still expect growth of 0.8% over 2024 as a whole, a limited increase partly due to a flat carryover.

[1] See Financial Times article, European Central Bank is ready to start cutting interest rates, says chief economist, 27 May 2024.

Article completed on 28 May 2024