Eurozone Inflation Slows, Manufacturing Logs Mild Contraction


Euro area inflation eased to an eight-month low in January on slower growth in energy prices, and the unemployment rate remained unchanged at a lower level, data from Eurostat showed Wednesday. Elsewhere, a private survey said the factory downturn in the currency bloc slowed suggesting that the worst of the slump has passed, a day after the official data revealed that the region narrowly escaped a shrinkage at the end of 2022.

Inflation slowed more-than-expected to an 8.5 percent in January from 9.2 percent in December, flash estimate from Eurostat revealed. Prices were expected to climb 9.0 percent. This was the lowest rate since May 2022.

Core inflation that excludes prices of energy, food, alcohol and tobacco, was 5.2 percent in January, unchanged from December, but slightly above economists’ forecast of 5.1 percent.

Despite the slowdown in overall inflation, high core inflation will be enough for the European Central Bank to hike the rate by another 50 basis point tomorrow, ING economist Bert Colijn said.

The S&P Global manufacturing Purchasing Managers’ Index, or PMI, rose to a five-month high of 48.8 in January from 47.8 in the previous month. The reading matched the flash estimate.

Chris Williamson, chief business economist at S&P Global Market Intelligence, said the picture is considerably brighter than the lows seen back in last October heading into the winter.

Nonetheless, the economist said the economy has also yet to feel the full impact of higher interest rates, which look set to rise further in the coming months, presenting a potentially challenging outlook for economic growth.

Official data released on Tuesday showed that the euro area economy grew 0.1 percent sequentially in the fourth quarter after rising 0.3 percent in the third quarter.

The International Monetary Fund said on Monday that growth in Eurozone will bottom out at 0.7 percent this year before improving to 1.6 percent in 2024.

Despite weak economic growth, the unemployment rate in the 20-nation currency bloc remained unchanged at 6.6 percent in December. In the same period last year, the rate was 7.0 percent.

The youth unemployment rate also held steady at 14.8 percent in December.

The unemployment rate is likely to increase over the coming months as the economy falls into recession. That said, the increase will probably be smaller than during previous recessions, Capital Economics economist Adrian Prettejohn said.

Employment level rose at the fastest pace in three months in January, the S&P survey showed. Stock of finished goods dropped for the first time since May 2022 as companies adjusted their inventories.

Manufacturing output continued to fall in January, extending the current sequence of contraction which began in mid-2022. Nonetheless, the decline was the weakest in seven months.

New orders declined sharply in January and new export business fell for an eleventh month in a row. This was a reflection of generally subdued client demand amid high inflation and uncertainty.

On the price front, the PMI survey revealed that input cost inflation eased to a 26-month low. Meanwhile, selling prices grew at a slightly faster pace, but the rate was well below the 2022 trend.

Growth expectations among manufacturers improved the most since February 2022, prior to Russia’s invasion of Ukraine.

Of the Eurozone countries monitored by the S&P Global survey, manufacturing PMIs rose across the board at the start of the year.

Germany’s manufacturing sector continued to shrink on declining new orders in January. Fall in orders, in turn, lowered production but there was renewed optimism among producers. The S&P Global/BME factory PMI climbed to 47.3 from 47.1 in December. The flash reading was 47.0.

France manufacturing sector returned to positive territory in January as the demand downturn lost strength and employment registered a rebound. The final manufacturing PMI came in at 50.5, up from 49.2 in the previous month but below the flash 50.8.

Italy’s manufacturing sector also returned to growth in January. The PMI registered 50.4 in January, up from 48.5 in December.

Spain’s manufacturing sector remained firmly within contraction territory. The index rose to 48.4 in January from 46.4 in the previous month.

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