Euro zone factory output ends first quarter on strong note, cost pressures ease - PMI
Euro Zone Manufacturing Performance and Economic Outlook
LONDON, July 1 (Reuters) - Euro zone manufacturing output ended its best quarter since early 2022 last month with easing cost pressures as the U.S. and Iran negotiated a ceasefire giving relief to factories even as sluggish export demand weighed on activity growth, an S&P Global survey showed on Wednesday.
Impact of Middle East Conflict on Supply Chains
The Middle East conflict continued to cast a shadow over supply chains, although signs of relief emerged with the manufacturing sector's supplier delivery times subindex climbing to a three-month high. To navigate supplier disruptions, manufacturers drew heavily on pre-purchased materials, causing pre-production inventories to contract sharply.
PMI Readings and Survey Insights
The S&P Global Eurozone Manufacturing PMI slipped to a four-month low of 51.4 in June from May's 51.6 but remained above the 50.0 threshold separating growth from contraction for a fifth month. The reading was just above a preliminary estimate of 51.3.
S&P Global noted that most survey responses were collected before the signing of a memorandum of understanding for a ceasefire between the United States and Iran on June 17, meaning the full impact on supply chains and energy costs was not yet captured in the data.
Expert Commentary on Manufacturing Resilience
"A further rise in manufacturing output in June adds to signs of encouraging resilience in the euro zone economy," said Chris Williamson, chief business economist at S&P Global Market Intelligence. "June's expansion in fact rounds off the strongest calendar quarter for euro area manufacturing production since the opening months of 2022 and will offset the recent decline that's been recorded in the services economy."
Uncertainties Ahead for Manufacturing Growth
"However, whether the better news out of the Middle East leads to a further improvement in the near-term performance of the manufacturing economy is not clear cut.
"On one hand, lower energy prices and improved supply conditions are very positive, not only reducing firms costs and alleviating potential supply disruptions but also helping boost consumer demand via lower inflation.
"On the other hand, producers have benefitted in recent months from precautionary stockpiling, which is already starting to fade and could start to act as a drag on growth in the coming months."
S&P Global noted most survey responses were collected before the signing of a memorandum of understanding for a ceasefire between the United States and Iran on June 17, meaning the full impact on supply chains and energy costs is not yet captured in the data.
Cost Pressures and Inflation Trends
"This sustained growth was accompanied by a welcome cooling of cost pressures, largely reflecting the sharp drop in oil prices seen during the month alongside an easing of supply worries."
Key Economic Indicators and Factory Activity
A Reuters poll published at the start of June predicted a 0.1% expansion of the economy this quarter. [ECILT/EU]
Orders, Output, and Country Performance
New orders returned to modest growth last month after stagnating in May though the increase was only marginal. Export orders remained a slight drag.
The output sub-index rose to a two-month high of 51.7 in June from 51.3. Spain and France were the only countries in the survey to record declines.
Employment and Price Developments
Factory headcount continued to shrink though the pace of job losses moderated.
On prices, input cost inflation — while still elevated — fell to its softest pace since March, snapping a run of accelerating pressure stretching back to September. Output charge inflation also eased and was at a three-month low offering some relief to buyers.
Monetary Policy and Business Confidence
The European Central Bank raised interest rates in June as a war-related energy cost surge pushed inflation over 3%, well in excess of its 2% target.
Business confidence rose to a four-month high in June, recovering further from a 17-month low in April, but sentiment remained slightly below its long-run historical average.
(Reporting by Jonathan Cable; Editing by Hugh Lawson)
