Eurozone manufacturers’ orders surge despite currency strength

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http://maltawinds.com/2017/09/03/eurozone-manufacturers-orders-surge-despite-currency-strength/

The eurozone cemented its place as a driver of global growth on Friday with new survey data suggesting that the region’s manufacturers are seeing a summer surge in orders despite the recent gains in the EU’s common currency.

The robust purchasing managers’ index, which tracks indicators like employment and inventories at plants across the region, capped a week in which the euro hit a two-and-a-half year high against the dollar and even normal eurozone laggards like Italy showed signs of economic strength.

The strong manufacturing PMI, compiled by data company IHS Markit, will make welcome reading for policymakers at the European Central Bank ahead of a crucial meeting next week to discuss how to wind down its €2tn economic stimulus programme.

The index rose to 57.4 in August, up from 56.6 in July and well above the crucial 50 level that marks an expansion in activity. It was one of the best readings since 2011. Chris Williamson, an economist at IHS Markit, said that while the euro’s strength could curb exports — the currency rose above $1.20 on Tuesday for the first time since early 2015 — the new data showed that eurozone companies “generally expect the current strong growth spell has further to run”.

The PMIs also suggest that ECB policymakers have correctly forecast that the region’s recovery is becoming increasingly broad — a separate reading for Italy hit a six-and-a-half year high of 56.3, a day after Rome published data showing that the number of employed Italians rose above 23m for the first time since the outbreak of the eurozone crisis.

The PMI reading for Greece, long the most troubled eurozone economy, hit a nine-year high of 52.2. Readings for France, the Netherlands and Austria were also at their highest level for more than six years.

The eurozone’s recovery has been the surprise economic success story of 2017, with growth in the region outpacing the UK after years of underperformance.

ECB rate-setters have become concerned by the euro’s rise, especially since a weak currency helped pull the region out of its five-year slump in 2015. But with economic data continuing to point to a strong recovery and inflation rising in August, the currency’s appreciation is not expected to play a central role in next Thursday’s governing council discussions.

A fresh round of economic forecasts is, however, expected to downgrade projections for inflation next year to take into account the stronger euro, making it harder for the ECB to hit its inflation goal of just under 2 per cent.

“The stronger euro will mechanically push staff projections for inflation lower and complicate the ECB’s communication, but it should not derail the exit [from stimulus],” said Frederik Ducrozet, economist at Pictet Wealth Management.

No decision on tapering the €60bn-a-month quantitative easing programme is expected until the late-October meeting. Mario Draghi, ECB president, has not attempted to talk down the currency’s rise at recent speeches delivered in the US and in Germany. Mr Draghi has voiced his concern that, despite the recovery, wage growth will remain lacklustre, leaving inflation below 2 per cent years from now.

Financial Times