Eurozone manufacturing loses its fizz

Eurozone manufacturing activity may have lost some of its fizz in March although growth remains robust, a closely-watched survey indicated on Monday.

The manufacturing sector purchasing managers’ index for the 13-country region slipped to 55.4 last month – a thirteen month low – from 55.6 in February.

That remained consistent with industrial production growing at an annual rate of 4 per cent, according to the Royal Bank of Scotland (RBS), which releases the index with NTC Economics. But it suggested that the upswing might have reached a peak.

Germany’s index fell for the third consecutive month, although it remained higher than France’s, and the decline remained “moderate in view of the stellar performance seen in 2006,” the RBS said. France’s index was at a three-month high.

European Commission confidence indicators last week showed eurozone economic sentiment at the highest level since January 2001. However, a number of clouds lie on the horizon: a strong euro, higher eurozone interest rates, slower US growth and a three percentage point increase in German VAT might have acted as a brake on eurozone growth.

Ken Wattret, economist at BNP Paribas, argued that the purchasing managers’ indices, had in the past “captured turns [in the economic cycle] more successfully”.

Even if confirmed, evidence of a slight deceleration in activity is unlikely to deter the European Central Bank from pushing ahead with at least one more interest rate increase, possibly in June.

Jacques Cailloux, economist at RBS, cited an increasing tendency by companies to pass-on price rises to customers and “evidence that manufacturing continues to struggle with capacity constraints” as spelling inflationary dangers ahead.

In spite of the strength of the eurozone’s economic upswing, the ECB is not yet convinced that there has been a long term improvement in the rate at which the region can growth without creating excessive inflation pressures. Jean-Claude Trichet, ECB president, described the stronger eurozone growth pick-up as “largely cyclical,” in an interview with four European newspapers published on Monday.

The ECB was not rethinking its estimate of the eurozone’s potential growth growth rate, currently put at about 2 per cent to 2.25 per cent,Mr Trichetadded. “That being said, we are looking very carefully at the evolution of productivity, which is one of the most important parameters.”

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