Euro zone manufacturing registered its strongest month of expansion in nearly four years in February, according to the HCOB Eurozone Manufacturing Purchasing Managers' Index (PMI) compiled by S&P Global. The PMI increased to 50.8 from 49.5 in January, marking the highest level since June 2020 and the first time the index has been above the 50.0 threshold - the dividing line between contraction and growth - since August.
The survey pointed to a broad-based improvement in activity across the region. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, noted that six of the eight nations covered in the poll were now in growth territory, reflecting a wider recovery in the manufacturing sector.
A key driver of the upturn was a notable rebound in new orders. The pace of incoming business rose at the strongest rate since April 2022, and demand was recorded in positive territory for only the second time in almost four years. Production also strengthened: factory output increased for the 11th time in the past 12 months, reaching a six-month high in February.
Country-level data highlighted a return to growth in Germany, which moved back into expansion for the first time in three-and-a-half years. Other economies recording solid manufacturing expansions included Italy, the Netherlands, Ireland and Greece. Not all members fared equally well: France saw manufacturing broadly stall after a solid upturn in January, Spain remained stagnant, and Austria experienced a marginal deterioration in activity.
External demand for goods stayed weak, with export orders still contracting. However, the rate of decline was the mildest recorded in three months, a sign that international demand pressures may be stabilising rather than worsening.
Despite the rise in activity, inflationary pressures intensified. Firms reported input costs climbing at the fastest pace in 38 months, citing higher energy prices among the drivers. In response to these cost increases, manufacturers raised their selling prices at the steepest rate since March 2023.
Business sentiment improved markedly even as challenges persisted. Firms' confidence about prospects for growth over the year ahead rose to a four-year high, indicating greater optimism within the sector. At the same time, factory payrolls continued to decline across the euro zone, extending a trend that began in June 2023, though the rate of job losses eased compared with earlier months.
Key points
- PMI rose to 50.8 in February from 49.5 in January, the highest since June 2020 and the first reading above 50 since August.
- New orders grew at the strongest pace since April 2022 and factory output reached a six-month high; Germany led the recovery.
- Input costs climbed at the fastest rate in 38 months, prompting the steepest rise in selling prices since March 2023; business confidence hit a four-year high.
Risks and uncertainties
- Rising input costs driven by higher energy prices are squeezing margins and forcing manufacturers to lift selling prices, which could weigh on demand and profitability in energy-sensitive sectors.
- Persistent declines in factory employment, despite moderating losses, pose risks for labour-intensive manufacturing segments and could limit capacity to scale production if demand continues to recover.
- Weak export orders, although contracting at a gentler pace, indicate external demand remains subdued and could constrain export-oriented industries.