Manufacturing rise
LONDON – Europe’s manufacturers reported another good month in April with gains in output, new business and recruitment, suggesting that an economic recovery that kicked in at the start of 2006 was gaining traction. The latest survey of company purchasing managers, compiled by NTC Research and considered the closest thing there is to a real-time snapshot, showed activity struck a five-and-a-half-year high. Economists drew two primary conclusions: that a rebound in the first quarter broadened at the start of the second, and that the European Central Bank (ECB) no longer had any reason to hold off on planned interest rate rises, part of a wider world trend. «It’s not just one index improving. We’ve got output, new orders, exports, employment and purchasing all rising at faster rates and all at levels not seen for over five years,» said Chris Williamson of NTC Research, which compiles the data. News that the Purchasing Managers’ Index (PMI) for the 12-nation eurozone hit its highest since September 2000, at 56.7, came at the same time as a PMI survey showing British manufacturing may now have pulled through a lull. Similar surveys showed manufacturing in good health in the United States and China, too. Japan, the other recovery story of 2006 besides Europe, did not fare so well last month. Another monthly dip in its PMI index from January’s peak prompted speculation about the risk of any significant currency rise this year hurting exports. News in the services sector in the eurozone, which accounts for three-quarters or more of economic output, is expected to mirror the April highs in manufacturing, in Italy as well as in Germany. The mid-range forecast from 47 economists polled by Reuters was for a rise in the April reading, to 58.5 from 58.2, but some analysts said this may be nearly as good as it gets because it is driven primarily by business-to-business deals rather than consumer demand. Pricing power While economists in Europe said the manufacturing readout yesterday showed again how well European firms were coping with expensive oil and other increasingly pricey commodities such as copper, some are starting to voice renewed concern. NTC’s Williamson said the latest eurozone survey, covering some 3,000 companies, showed that selling prices continued to grow much more slowly than the cost of materials and other expenses that go into producing goods. «How long they can continue to do that remains unclear,» he said. JP Morgan’s Silvia Pepino said there were signs that firms might now start to try to pass on an increasing part of their costs in final selling prices and that this was something the ECB would be worried about due to possible inflationary impact. One of the big input costs is oil, which hit a record of more than $75 a barrel in April and remains close to that level, though the euro’s recent rise against the dollar has helped to offset the pain for the eurozone because oil is paid for in dollars. But what the currency does to help on the oil side can cause damage to the export side. The boost European exporters got from a euro trading closer to $1.20 for much of last year may fade if recent trends in the currency markets continue. The euro was trading above $1.26 yesterday, which makes exports less competitive. The European Commission predicts that economic growth in the euro area will hit about 2 percent this year after just 1.3 percent in 2005, a year which ended with a whimper as Germany ground to a near halt. The ECB, which has raised its benchmark policy rate from 2 to 2.5 percent since start-December to head off inflation, meets again tomorrow but is expected by a majority of economists to hold off on another interest rise until June when it will have official GDP data for the first quarter available. Belgium is the only eurozone country to have already shown its colors for the first three months and economists took heart at seeing that GDP there rose a stronger-than-expected 0.8 percent versus the last quarter of 2005, indicating others might surprise positively too when the bulk of reports come out on May 11. Good omen In Germany, Europe’s biggest economy and the main source of the region’s renewed hopes this year, manufacturing activity remained stable in April according to the PMI survey, but at a high level. What grabbed the attention of economists was a significant improvement on the jobs front there, in Italy and overall in the eurozone. The index on hiring conditions, at 53.4, was at its highest level since November 2000 in Germany and, in the eurozone as a whole, that gauge of the recruitment climate hit its highest since January 2001. «This marked improvement… is a very good omen for private consumption,» BNP Paribas economist Florence Barjou said in a written note on the PMI surveys. While business confidence has hit its highest level in most countries in five or six years, countries such as Germany have been unable for years to generate similar confidence among households, forcing the economy to run on one engine – exports. Italy was the other notable surprise in yesterday’s reports. The Italian PMI rose to 57.0 in April from 55.5, while the French data ticked up to 55.3 from 54.6. «Furthermore, employment data pointed to a second consecutive monthly intake of staff, implying a belief among firms that orders will continue to rise and that sharp growth can be sustained,» said Alessandro Mitrovitch, head of Italian economic research at Royal Bank of Scotland.
