Eurozone factory activity picks up in April but the devil is in the details

• Manufacturing PMI 52.2 vs 52.2 prelim
• Prior 51.6

Much like the country-level reports would suggest, it is all about stockpiling here. That is the main reason boosting euro area manufacturing activity in April as both output and new orders pick up, but arguably for the wrong reason. Of note, it is the first time since June 2022 that all eight of the euro area countries covered by the survey registered readings above the 50.0 threshold.

But again, the devil is in the details.

Delivery times continue to shoot higher with delays reportedly being the worst since July 2022. Survey respondents
cited bulk ordering, logistical disruptions arising from the war
in the Middle East and reduced raw material availability as
reasons for that. As such, it points to supply chain issues starting to become more evident.

Meanwhile, inflation pressures also intensified further as input price inflation jumped higher once again, hitting
a 46-month high. That has also now started to translate to higher output charge inflation, with that accelerating to a 39-month high. Ouch.

HCOB notes that:

“Although the PMI has risen to its highest for nearly four years, the
survey is more a cause for alarm than celebration.

“Production and orders books are being buoyed by the building
of safety stocks as a result of widespread concerns over supply
shortages and rising prices emanating from the war in the Middle
East.

“Look instead to the survey’s future output expectations index for
a truer picture of the economic situation that is developing in the
eurozone. Manufacturers’ optimism about the year ahead has sunk
to its gloomiest for nearly one-and-a-half years, the war having
shattered the growing confidence that had been building earlier in
the year.

“Producers are concerned not only that the war will dampen
demand, building on existing headwinds such as US tariffs and the
Ukraine war, but also that war-related supply shortages will curb
production in the months ahead.

“The danger is that policymakers may be lulled into complacency
about economic growth in the face of these stronger headline PMI
numbers, but there is a clear signal from the survey that this growth
is not going to persist. On the other hand, the survey data also
suggest that coming inflation shock may be greater than many have
been anticipating, creating a major dilemma for rate setters.

“To put the price shock in perspective, the jump in manufacturers’
selling price inflation in April was the sharpest recorded since
eurozone PMI survey data were first available in 1997, reflecting the
need to pass sharply higher costs onto customers. Over the two
months since the war started, the jump in input cost inflation has
been far larger than anything previously recorded over the survey’s
near-three-decade history.”

This article was written by Justin Low at investinglive.com.