Global demand propels eurozone factories into full throttle mode

Orders, goods and jobs growing at record rate since the creation of the single currency

Eurozone factories are boosting production at one of the fastest rates recorded since the launch of the single currency as the result of booming global demand and the pro-growth approach adopted by the European Central Bank.

The latest snapshot of manufacturing in the 19-nation zone shows that orders, output and employment were all growing strongly last month.

A breakdown of the purchasing managers’ index, produced each month by IHS Markit, showed robust growth in every eurozone country. Greece reported its best performance in more than a decade with Italy at its highest level in almost eight years.

Greece suffered a 30% fall in output and Italy a prolonged recession during a crisis that at one point put the continued existence of the eurozone in doubt.

But the ECB’s decision to cut interest rates to zero and then to follow the lead of the US Federal Reserve and the Bank of England in printing electronic money – through the process known as quantitative easing – has led to a pronounced improvement in industrial performance and overall economic growth rates.

The IHS Markit data shows manufacturing growth as an index, with readings below the 50 level showing shrinkage while results higher than 50 demonstrate growth. The Greek PMI came in at 55.2 – a 123-month high – while the Netherlands registered a record high of 62.5. Italy recorded an 83-month high of 59.0.

Germany and France – the two biggest eurozone economies – recorded 61.1 and 58.4 respectively, slightly down on recent months but still performing well.

The eurozone PMI for January stood at 59.6 points, again slightly down on the 60.6 recorded in December 2017, but well above the 50 level that marks whether an economy is growing or going backwards.

Chris Williamson, chief business economist at IHS Markit, said: “The eurozone’s manufacturing boom continued in full swing in January. Output grew at one of the fastest rates recorded over the survey’s 20-year history, matched by a further near-record surge in new orders.

“Employment likewise showed one of the largest gains yet recorded by the survey as firms expanded capacity in line with rising demand.”

The pace of growth could push up prices, said Williamson, because demand is growing faster than capacity, “leading to near-record increases in both backlogs of uncompleted orders and suppliers’ delivery times”.

He added: “The hike in prices associated with the further shift to a sellers’ market for many goods was accompanied by a steep rising in oil prices during the month, resulting in a further intensification of cost pressures. With higher costs being increasingly passed on to customers, the survey sends a warning signal for a potential rise in future consumer price inflation.”

Up until now, eurozone inflation has remained weak, allowing the ECB’s president Mario Draghi to keep providing economic stimulus, but the IHS Markit report revealed that output price inflation – which measures the cost of goods when they leave factory gates – was last month running at its highest level in six and a half years.

If higher factory gate prices lead to dearer goods and services for consumers, the ECB will come under pressure to raise interest rates and stop buying €30bn (£26bn) of bonds a month when the current QE programme ends in September.

The Markit/Cips PMI Index for UK manufacturing showed activity fell to 55.3 last month from 56.2 in December, missing City forecasts of a further acceleration in growth. However, the measure is still well above its long-run average of 51.7 and is being boosted by exports. Markit said: “There were reports of increased sales to clients in North America, China, mainland Europe, the Middle East and Japan.”

As in the eurozone, UK factories are starting to be affected by stronger global demand for raw materials, which has pushed up the cost of oil, metals, food and chemicals, and squeezed manufacturers’ profit margins. The PMI survey showed purchase prices rose at the fastest rate in 11 months in January, and to one of the greatest extents in its history.

The Bank of England is likely to monitor the increase in prices, should companies then push up the cost of goods sold to consumers, which would cause an upturn in inflation at a time when households are already squeezed by weak wage growth and rising prices.

EU countries ranked by manufacturing PMI

Netherlands 62.5

Austria 61.3

Germany 61.1

Italy 59.0

France 58.4

Ireland 57.6

UK 55.3

Spain 55.2

Greece 55.2

Source: IHS Markit and Markit CIPS

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Larry Elliott

The GuardianTramp

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