Uneven private sector growth in April pressures ECB to hike in May

(Alliance News) - Growth in the eurozone's private sector became "increasingly uneven" in April, according to preliminary survey data on Friday.

The gulf between the eurozone's manufacturing and services sectors widened as private sector growth in April was led entirely by the services sector. Bert Colijn, senior eurozone economist at ING, said the rebound in services "mask[ed]" the weakening manufacturing performance.

"Overall, it looks like the economy is rebounding from a feeble winter at the moment, but manufacturing weakness remains a concern and dampens the upturn," he said.

The flash eurozone services purchasing manufacturing index from Hamburg Commercial Bank rose to a 12-month high of 56.6 points in April, from 55.0 in March.

Rising further above the 50-point mark that separates contraction from expansion, it shows growth strengthened during the month. The reading was higher than FXStreet-cited market consensus of 54.5.

"Growth became increasingly uneven in April," HCOB noted, with manufacturing output seeing its sharpest rate of deterioration since December, after two months of marginal growth.

The overall flash manufacturing PMI fell to a 35-month low of 45.5 from 47.3, indicating the downturn in the sector worsened. This was below market consensus of 48.0.

The gulf between the services and manufacturing sector was the widest seen since early 2009. "The survey has not previously recorded such a strong service sector expansion at a time of manufacturing decline," HCOB said.

New orders in manufacturing fell at the steepest rate for four months, while growth of new orders in the service sector was the highest seen since last April.

The flash composite PMI - which weighs the services and manufacturing indices - rose to 54.4 from 53.7 - an 11-month high.

Analysts at Capital Economics commented that the latest surveys suggest that the eurozone economy started the second quarter of 2023 on a strong footing.

"With underlying price pressures also still strong, we think a 50 basis point hike at the European Central Bank meeting in May remains the most likely outcome," the analysts said.

Rory Fennessy, economist at Oxford Economics, agreed that more hikes were on the table: "With core inflation confirmed to have risen slightly higher in March, today's PMIs will likely further cement the resolve of the ECB in continuing further down the hiking cycle."

However, Fennessy said he expects a lower 25 basis point hike in May, June, and July.

"The April PMIs could mean upward revisions to some of our near-term GDP forecasts across the region. But the outlook for later this year is less optimistic as the impact of tighter financial conditions feed further into the real economy," he added.

Cyrus de la Rubia, Hamburg Commercial Bank chief economist, said: "Price developments in the services sector are likely to continue to worry the European Central Bank. Neither input prices nor sales prices are showing any significant slowdown in the upward momentum of prices according the HCOB PMI survey.

"Services prices play a particularly large role in the core inflation rate on which the ECB is currently focusing. This increases the likelihood that the ECB will tighten monetary policy more, or for longer," he concluded.

The ECB will announce its latest interest rate decision on May 4.

The HCOB flash composite PMI is produced by S&P Global from responses to surveys sent to around 5,000 companies in the eurozone's manufacturing and services sectors, with data collected between April 12 and 19.

By Heather Rydings, Alliance News senior economics reporter

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