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Manufacturing output in Europe: How are the euro and pound being affected?

By Angela Barnes

13:42, 1 March 2022

industrial factory in mechanical engineering for the manufacture of transformers - interior of a production hall
UK and eurozone manufacturing PMI data shows positive business momentum – Photo: Shutterstock

Manufacturing output growth in the eurozone was boosted in February as a result of stronger demand and fewer delivery delays, while UK production accelerated to a seven-month high, thanks to stronger domestic demand and the easing of supply-chain pressuress.

This is according to data supplied by the latest IHS Markit/Chartered Institute of Procurement & Supply (CIPS) Purchasing Managers’ Index (PMI) published on Tuesday.

PMI manufacturing data from Germany, France, Greece, Italy, Spain and Ireland was also released this morning for last month.

Capital.com has taken a closer look at the PMI data for the eurozone and the UK, specifically to explore whether business confidence has returned, and what this means for the euro (EUR) and UK pound sterling (GBP).

Francesco Pesole, a forex (FX) strategist at ING, shared his thoughts with Capital.com after the figures were released. 

He said: “February PMIs in Europe have generally confirmed the region is enjoying decent growth momentum, even though manufacturing PMIs declined in Germany compared to January.

“In the UK, the growth sentiment appears slightly more upbeat. The implications for EUR/GBP are, however, quite limited, as the focus of central banks is currently more on inflation.

“When it comes to policy divergence, the more hawkish Bank of England (BoE) compared to the European Central Bank (ECB) still argues in favour of EUR/GBP downside. That said, geopolitical developments are likely to remain a primary driver for longer,” he said.

Marc Chandler, managing partner and chief global strategist of Bannockburn Global Forex, told Capital.com that the market has practically ruled out a 50-basis-point (bps) hike from the BoE on 17 March as of Tuesday.  

That first market hike from the ECB is now being pushed from the third quarter (Q3) to the fourth quarter (Q4), he added. 

Manufacturing output in the eurozone

As Francesco Pesole noted, business momentum has improved in the UK and also across Europe generally as revealed in the latest PMI data.

In the eurozone, the final manufacturing PMI stood at 58.2 last month – a dip from January’s 58.7 headline, and also below an initial estimate of 58.4. However, it is still above the 50 mark, confirming growth as opposed to contraction.

Despite the dip, ​​output and new orders gained further momentum following improvements in January, according to an IHS Markit press release, which stated: “There were also fewer supplier-delivery delays across the month, with lead times lengthening to the weakest extent for just over a year.

“Nevertheless, capacities across the sector continued to be tested and, while rates of both input cost and output price inflation slowed in February, they were still among the fastest on record.”

The Netherlands saw the strongest improvement in manufacturing conditions during February, followed by Germany and Austria. Strong growth rates were also recorded in Italy, Ireland and Greece, while Spain was the weakest, followed by France.

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Demand for goods and other factors

Joe Hayes, a senior economist at IHS Markit, also pointed out that the drop in the headline PMI should not distract from the overall picture in the eurozone, and that it should be viewed as a largely positive month for the manufacturing sector.

He said: “Demand for goods is trending higher, with the rate of expansion accelerating to a six-month high. Underlying sales conditions are clearly strengthening as Europe overcomes the Omicron wave of Covid-19 and businesses step up their recovery efforts.

“Another positive move was in the suppliers’ delivery times gauge, which moved up during February to its highest since the beginning of last year, signalling the least-marked deterioration vendor performance since then.

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“It was actually this move that pulled the headline PMI lower, but tentative signs of stabilisation across supply chains is a good thing because it will help production capacities increase and is what we need to see for inflation to cool,” he said in a press release.

Hayes also highlighted that inflation is still running “extremely hot”  but said price setters are still carrying substantial pricing power.

“Strong demand for inputs, coupled with scarce supply, continues to drive vendor prices higher. In turn, firms are passing higher costs on to their clients. Although there was some welcome easing in input cost and output price inflation rates in February, they are both still among the fastest ever seen,” he added.

The escalating violence in Ukraine as a result of Russia’s assault on the country last week also risks dampening growth and adds further fuel to inflation risks, Hayes noted.

“We’ve also seen Brent crude already moving higher in response. It’s going to take prudent macroeconomic policy management to re-anchor inflation expectations without denting the demand recovery too heavily,” he said.

Manufacturing output in the UK

By comparison, the growth rate of UK manufacturing production has accelerated. The UK PMI rose to 58.0 in February from 57.3 in January, thus staying well above the neutral 50 mark for 21 successive months.

This was helped by stronger domestic demand, faster growth of output and fewer raw material shortages as global supply-chain pressures eased. However, new export business decreased for the fifth time in the past six months, due to Brexit-related issues and ongoing pandemic restrictions with trading partners, as well as the loss of business due to long lead times.

Rob Dobson, senior economist and director for economic indices at IHS Markit, commented on the results in the press release, highlighting that inflationary pressures remained elevated across the manufacturing sector in February. 

Said Dobson: “Companies were hit hard by rising transportation, energy and commodity prices, leading to further increases in selling prices.

“That said, rates of inflation for input costs and output charges eased further. Although this easing may have provided some temporary respite, signs that energy and oil prices may stay high is a further cause for concern.”

Duncan Brock, group director at CIPS, also commented on the UK data: “There were certainly several positives for the UK’s manufacturing sector in February, as 64% of manufacturing businesses remained optimistic.

“However, this success comes with a health warning as the Ukrainian crisis deepens and the potential for higher commodity prices, disruptions to supply and economic pain must be considered by businesses as they try to build resilience into their supply chains in the coming months,” he said.

What it means for the EUR/GBP pair

Today, as investors carefully watch the situation in Ukraine, the pound (GBP) has edged up against the euro (EUR) and the US dollar (USD), while the euro (EUR) has fallen as Russia continues its assault.

The GBP/EUR exchange rate was trading at €1.20 at 15:10 GMT, showing little movement from its opening level. The EUR/USD exchange rate was at €1.11, while the GBP against the USD was trading at £1.33.

As Francesco Pesole pointed out previously to Capital.com, the PMI data implications for the EUR/GBP exchange pair are limited, with the focus of central banks more on inflation. Also, there is a more hawkish stance from the BoE compared to the ECB, which is still arguing in favour of EUR/GBP downside with regards to policy divergence.

Clearly, geopolitical developments will likely remain a primary driver for longer too – however, this also comes as the eurozone inflation hit 5.1% in January. 

Preliminary data due out this week is expected to show another rise, which is likely to put further pressure on the ECB to tighten policy.

Markets in this article

Oil - Brent
Brent Oil
78.778 USD
0.551 +0.700%
EUR/USD
EUR/USD
1.08254 USD
-0.00185 -0.170%
EUR/GBP
EUR/GBP
0.85740 USD
-0.00086 -0.100%
GBP/USD
GBP/USD
1.26279 USD
-0.00085 -0.070%

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