LONDON (Reuters) – Euro zone business activity has been stronger than expected this month, a survey showed on Thursday, although prices also rose at a record pace, likely adding to pressure on the European Central Bank to raise interest rates.
Some of that growth came from a rebound following the lifting of COVID restrictions, and the outlook is murky as supply chain issues caused by the coronavirus pandemic have worsened following Russia’s invasion of Ukraine.
S&P Global’s Flash Composite Purchasing Managers’ Index, seen as a good gauge of overall economic health, slipped to 54.5 in March from 55.5 in February although it was comfortably above the median 53.9 forecast in a Reuters poll.
Anything above 50 indicates growth.
“The survey data underscore how the Russia-Ukraine war is having an immediate and material impact on the euro zone economy, and highlights the risk of the euro zone falling into decline in the second quarter,” said Chris Williamson, chief business economist at S&P Global.
“The war has aggravated existing pandemic-related price pressures and supply chain constraints.”
Both the composite input and output prices indexes were at their highest in the survey’s history.
The output prices index jumped to 65.7 from 62.3 suggesting inflation, already a record 5.8% in February, has further to climb. The ECB would like it at 2%.
Earlier this month the ECB said it would stop pumping money into financial markets this summer, paving the way for an increase in interest rates.
A PMI covering the bloc’s dominant service industry fell to 54.8 this month from 55.5 but was ahead of the Reuters poll estimate for 54.2.
Demand was resilient and with more pandemic-related restrictions eased firms increased headcount at a faster rate. The services employment index rose to 54.8 from 53.6.
While factory activity remained solid the pace of growth slowed to its weakest since January last year. The manufacturing PMI dropped to 57.0 from 58.2 but was ahead of expectations for 56.0.
An index measuring output, which feeds into the composite PMI, sank to 53.6 from 55.5.
High inflation and concerns over Russia’s invasion of Ukraine put a severe dent into optimism. The factory future output index plummeted to 53.8 from 68.5, its lowest reading since May 2020 – not long after the coronavirus pandemic began.
“Businesses are themselves bracing for weaker economic growth, with expectations of future output collapsing in March as firms grow increasingly concerned about the impact of the war on an economy that is still struggling to find its feet from the pandemic,” Williamson said.
(Reporting by Jonathan Cable; Editing by Hugh Lawson)
