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Euro-Area Recovery Kicks In as Services Return to Growth

Jana Randow
·3-min read

(Bloomberg) --

The euro area’s economic recovery got fully underway in April with services returning to growth and manufacturing expanding at a record pace. Price pressures mounted as companies faced unprecedented delivery delays.

Surveys of purchasing managers suggest that the 19-nation region is turning the page on the pandemic at the start of the second quarter, after on-and-off lockdowns dragged it into a double-dip recession.

Euro-area services grew in April for the first time in eight months, a milestone for a sector that has been hamstrung by some of the worst restrictions since the outbreak, with many shops, hospitality and entertainment providers shut. The region’s manufacturing upturn, the strongest in more than two decades of data collection, continued to be led by Germany.

New orders across both sectors rose to the highest level since 2018, and backlogs grew for a second month. Together with confidence at the highest level since data were first available in 2012, that led companies to continue to add jobs.

“The euro-zone economy showed encouraging strength,” said Chris Williamson, an economist at IHS Markit. “Although the service sector continued to be hard hit by lockdown measures, it has returned to growth as companies adjust to life with the virus and prepare for better times ahead. The manufacturing sector is meanwhile booming.”

While coronavirus infections continue to rise across the bloc, many businesses have learned to cope and an acceleration in vaccinations has fueled optimism that remaining restrictions can soon be lifted.

The European Central Bank predicts the economy will expand in the second quarter, and President Christine Lagarde expressed confidence on Thursday that the region will see a “firm rebound” in the course of the year. She also promised to keep monetary stimulus abundant to keep financing conditions favorable for companies and households.

“The ECB delivered incredibly good messages,” Agnes Belaisch, chief European strategist at Baring Investment Services, said on Bloomberg TV. Low inflation means policy makers won’t need to taper bond-buying, they’re focused on borrowing costs across all parts of the market, and risks to the outlook are balanced -- “which means, that whatever scars there are in the economy, and there are some, will not present headwinds to growth.”

Still, over 1.5 million more people are unemployed than before the crisis, with millions more dependent on government furlough programs that could mean they still lose their jobs once support schemes expire. The economy isn’t expected to make up lost ground until the middle of 2022 -- a full year later than the U.S.

Professional forecasters surveyed by the ECB lowered their growth outlook for the year to 4.2% from 4.4%, and raised their projection for next year to 4.1% from 3.7%.

Factory prices are being boosted by a combination of the strong demand, delivery delays and the biggest jump in input costs in a decade. Prices charged rose at the fastest rate since early 2018, with increases for goods at an all-time high and those for services the biggest since the start of the pandemic.

“Consumer-price inflation may well rise sharply in coming months as a result,” said Williamson, “though the extent of the rise will be dependent on the strength of demand and the supply situation, both of which remain highly uncertain at the moment.”

The ECB said on Friday that its own conversations with non-financial companies have highlighted “increasing constraints” on their ability to respond to demand pressures. Manufacturers are being hit by a shortage of inputs -- most acutely semiconductors -- and transport bottlenecks that are pushing up costs. Businesses expect supply strains to worsen in the second quarter before gradually easing in the second half of the year.

(Adds comment from strategist in eighth paragraph, ECB survey in 10th.)

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