The eurozone’s private sector showed minimal growth in February, indicating a fragile economic recovery amid rising inflationary pressures. According to the latest data from S&P Global, the Composite Purchasing Managers’ Index (PMI) remained steady at 50.2, signaling a slight expansion but with concerns over persistent price pressures.
Weak Growth in Services, Rising Inflation
While the eurozone’s overall PMI remained above the 50 threshold, services activity slowed. The Services PMI dropped to 50.6 in February from 51.3 in January, reflecting a decline in demand for services and weaker foreign demand. Input cost inflation accelerated, rising to its highest pace in nearly two years, as businesses passed on higher costs to consumers.
Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted, “Given the ongoing inflationary pressures, some ECB policymakers are reconsidering the need for a rate cut at the upcoming meeting.”
Divergence Across Eurozone Countries
Economic performance varied significantly across key eurozone countries. France saw a sharp contraction, with its Composite PMI falling to 45.1 from 47.6. Germany, while showing slight growth, saw a small dip in its Composite PMI to 50.4, missing expectations. In contrast, Spain and Italy showed stronger-than-expected growth, with Spain’s Services PMI rising to 56.2 and Italy’s PMI climbing to 53, demonstrating resilience in southern Europe.
ECB Faces Dilemma Amid Inflation
The European Central Bank (ECB) is expected to cut interest rates by 25 basis points this week. However, the persistence of inflation, especially in the services sector, complicates this decision. Eurostat’s preliminary data for February showed headline inflation easing slightly to 2.4%, but core inflation remained elevated at 2.6%, well above the ECB’s target.
Market Reactions: Euro Strengthens, Stocks Rally
Despite the weak PMI data, financial markets responded positively. The euro gained strength, rising to 1.0715 against the US dollar, and European stocks rebounded. The Euro STOXX 50 rose 2.2%, while Germany’s DAX climbed 3.2%. Banking and industrial stocks, particularly Deutsche Bank and BASF, saw notable gains, while Deutsche Telekom and Linde lagged behind.
The ECB faces a challenging balancing act in the coming months, as policymakers must decide how to navigate inflationary pressures while fostering economic growth across the eurozone.