Europe’s biggest economies beat expectations as business activity returned to growth, boosting the chances they can stave off recessions. Gauges of private output in Germany and France both signalled expansion last month after pullbacks in January, while the UK’s purchasing managers’ index showed the first positive reading in six months – jumping to 53 from 48.5 In the 20-nation eurozone, activity rose at the fastest rate since May last year. The numbers suggest the economic downturns many analysts had forecast after Russia’s war in Ukraine sent energy prices sky-high may not materialise, though the Bundesbank says Germany may yet endure a slight contraction this year.
There are potential knock-on effects for monetary policy. As fears of economic damage recede and firmer growth underpins inflation, the European Central Bank and the Bank of England may be more inclined to push with raising interest rates.
“Growth has been buoyed by rising confidence as recession fears fade and inflation shows signs of peaking,” Chris Williamson, an economist at S&P Global, which compiled the PMIs, said. “Manufacturing has also benefitted from a major improvement in supplier performance.” The numbers follow a slight advance in Australia’s PMI and an unchanged growth reading in Japan. US figures are expected to show improvements, but still indicate a contraction. The Euro area’s performance was fuelled by services, which saw the strongest growth since June. Manufacturing output also improved as bottlenecks eased further.
In the UK, the sharp uptick in February’s PMI was driven by rising customer demand and increasing confidence among business executives after a subsidence in the market turmoil triggered by then Prime Minister Liz Truss’s budget plan.
Williamson said: “The survey’s inflation gauges add to the likelihood of the Bank of England tightening policy further, and potentially more aggressively.” That could also be the case in the euro region, where officials are determined to continue raising borrowing costs to what they call “restrictive” levels.
The ECB lifted rates by a half-point last month and all but promised an identical step in March. Governing Council member Olli Rehn said in comments released last month that further hikes beyond that are likely, and that the peak will probably be reached in the summer.
“The combination of accelerating growth and stubbornly elevated price pressures will naturally encourage a bias toward further policy tightening in the months ahead,” Williamson said.
Among the EU countries Ireland’s economy has grown steadily and the country is in line for ratings upgrades as bonds outperform peers. Irish debt levels are set to fall to just 39.3pc of GDP by the end of next year, according to Davy forecasts – far below the eurozone average of 91.4pc estimated by the European Commission.
A combination of prudent debt issuance by the National Treasury Management Agency (NTMA) and windfall taxes due to a post-Covid rebound in economic activity have dramatically improved the metrics.
The NTMA’s strategy of long-term debt issuance means that Ireland’s funding requirements will be negligible and low compared with peers, according to Davy – Ireland’s leading provider of stockbroking , wealth management and financial advisory services.
Ireland has just 9bn euros in debt maturing this year, all of which could be met with cash reserves. All the main ratings agencies, with the exception of S&P, upgraded Ireland’s sovereign debt rating last year in recognition of its strong budgetary position and robust growth outlook.
Last November, S&P raised its outlook on Ireland from stable to positive and said that although the economy would start to slow this year, it wouldn’t dip into negative territory. The NTMA raised 3.5bn euros in early January, meeting a substantial portion of the Government’s external funding requirements for 2023. (The writer is our foreign correspondent based in the UK)
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