Factories Highlight ECB Conundrum of Strong Growth, Weak Prices

(Bloomberg) -- Manufacturing can serve as an example for the challenges faced by the euro-area economy.

While a Purchasing Managers' Index points to broad-based economic growth, price pressures showed further signs of easing in July: A gauge for input costs fell to a 9-month low, while charges increased at the weakest pace since the start of the year, according to IHS Markit.

Price developments in the 19-nation region stand at odds with a strong recovery and increasingly tight capacity, and an appreciating euro risks undermining progress in steering inflation closer to the European Central Bank's goal. Policy makers are preparing for a debate about how much stimulus will be needed going forward, banking on economic momentum to bolster wages.

“While price pressures eased in July, inflationary pressures could pick up again if demand continues to outstrip supply,” said Chris Williamson, chief business economist at IHS Markit. “Euro-zone factories were buzzing with activity.”

A manufacturing PMI fell to 56.6 in July from a six-year high of 57.4 the previous month, the London-based company said in a statement. The “encouragingly buoyant reading” compares with a July 24 estimate of 56.8 and signals annual output growth of about 4 percent, according to the report.

National surveys signal economic expansion across the region, with Austria, the Netherlands and Germany being the best performers. French manufacturing accelerated to one of the fastest rates in six years and jobs creation surged to the highest in almost 17 years after President Emmanuel Macron consolidated his power in June parliamentary elections.

Employment in the currency bloc “continued to run at one of the highest rates seen for at least 20 years, with the hiring boom underscoring the current ebullient mood within euro-area factories,” said Williamson.

Eurostat will report gross-domestic product data for the second quarter at 11 a.m. Luxembourg time. Figures on Monday showed inflation remained unchanged at 1.3 percent in July, while joblessness fell to 9.1 percent in June, the lowest since early 2009.

To contact the reporter on this story: Alessandro Speciale in Frankfurt at aspeciale@bloomberg.net.

To contact the editors responsible for this story: Fergal O'Brien at fobrien@bloomberg.net, Jana Randow