Europe’s biggest economies beat expectations as business activity returned to growth, boosting the chances they can stave off recessions.
(Bloomberg) — Europe’s biggest economies beat expectations as business activity returned to growth, boosting the chances they can stave off recessions.
Gauges of private output in Germany and France both signaled expansion in February after pullbacks in January, while the UK’s purchasing managers’ index showed the first positive reading in six months — jumping to 53 from 48.5.
In the 20-nation euro zone, activity rose at the fastest pace since May 2022.
The numbers suggest the economic downturns many analysts had forecast after Russia’s war in Ukraine sent energy prices rocketing may not materialize, though the Bundesbank says Germany may yet endure a slight contraction in 2023.
There are potential knock-on effects for monetary policy. As fears of economic damage recede and firmer growth underpins inflation, the European Central Bank and the Bank of England may be more inclined to push on with raising interest rates.
“Growth has been buoyed by rising confidence as recession fears fade and inflation shows signs of peaking,” Chris Williamson — an economist at S&P Global, which compiled the PMIs — said Tuesday in a statement. “Manufacturing has also benefitted from a major improvement in supplier performance.”
What Bloomberg Economics Says…
“The euro-area composite PMI survey suggests the economy is holding up well under the weight of higher rates. The resilience thus far displayed may allow the hawks at the ECB to push up rates until the start of summer.”
—David Powell, senior euro-area economist. Click here for full REACT
The numbers follow a slight advance in Australia’s PMI and an unchanged growth reading in Japan. US figures later Tuesday are expected to show improvements, but still indicate a contraction.
The euro area’s performance was fueled by services, which saw the strongest growth since June. Manufacturing output also improved as supply-chain bottlenecks eased further.
In the UK, the sharp uptick in February’s PMI was driven by rising customer demand and increasing confidence among business executives after a subsidence in the market turmoil triggered by then-Prime Minister Liz Truss’s budget plan.
“The survey’s inflation gauges add to the likelihood of the Bank of England tightening policy further, and potentially more aggressively,” Williamson said.
That could also be the case in the euro region, where officials are determined to continue raising borrowing costs to what they call “restrictive” levels. The ECB lifted rates by a half-point this month and all but promised an identical step in March.
Governing Council member Olli Rehn said in comments released Monday that further hikes beyond that are likely, and that the peak will probably be reached in the summer.
“The combination of accelerating growth and stubbornly elevated price pressures will naturally encourage a bias toward further policy tightening in the months ahead,” Williamson said.
–With assistance from Mark Evans and Joel Rinneby.
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