Euro Zone Manufacturing Growth Slows as Input Costs Climb to Four-Year High
Euro Zone Manufacturing Sector Faces Rising Costs and Slowing Growth
Overview of Recent Manufacturing Activity
LONDON, June 1 (Reuters) - Growth in euro zone manufacturing lost momentum in May as demand for goods stagnated and supply-chain disruptions linked to the Middle East war pushed input costs to their highest in four years, a survey showed on Monday.
The S&P Global Eurozone Manufacturing PMI Index (PMI) fell to 51.6 in May from April's near four-year high of 52.2, but ahead of a preliminary estimate of 51.4.
A reading above 50.0 indicates growth in factory activity.
Expert Insights on Sector Performance
"Although euro area manufacturers reported an expansion for a fourth successive month in May, the sector is showing signs of struggling under the weight of rising prices and supply disruptions emanating from the war in the Middle East," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Demand and Output Trends
Stagnation in New Orders and Export Declines
New orders stagnated in May, a sharp reversal from April when demand - a key gauge of the sector's health - grew at its fastest pace in four years as consumers brought forward purchases. Export orders declined, adding to the pullback in overall demand.
Factory Output and Employment
Factory output continued to expand but at the slowest pace since January, with the output index slipping to a four-month low of 51.3 from 52.3 in April.
Employment has now fallen for three years. Manufacturers' confidence about the year ahead remained positive but below its long-run average.
Rising Input Costs and Inflationary Pressures
Surge in Energy and Raw Material Prices
On the prices front, input costs rose at the steepest pace since May 2022, driven by a surge in energy and raw material prices. Firms transferred some of their burden to customers by lifting prices charged at the fastest rate in three-and-a-half years.
Impact on Customers and Inflation Outlook
"Factories are having to pass higher costs on to customers, which will inevitably drive up inflation in the coming months. However, demand is being hit by higher prices, with May seeing order books stall after three successive monthly improvements," Williamson added.
Supply Chain Disruptions and Policy Challenges
Supply chain delays worsened to their most severe since June 2022, adding further upward pressure to costs. Policymakers face a difficult balancing act: the survey suggests they will want to contain the renewed inflation surge but faltering demand means aggressive interest rate rises carry risks.
European Central Bank Response and Economic Outlook
ECB Rate Hikes and Inflation Expectations
The European Central Bank will hike its deposit rate this month and at least once more this year to try to stop higher energy prices feeding into core inflation, according to a majority of economists polled by Reuters in May.
Inflation is expected to have risen further above the ECB's 2% target last month.
(Reporting by Jonathan Cable; Editing by Toby Chopra)
