Euro-Area Factory Bottlenecks Curb Output and Fuel Inflation

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Euro-area factories are struggling to keep up with the economic recovery as orders rise faster than production, setting the bloc up for a summer spike in inflation.

Delivery delays for raw materials and components are constraining output growth, leaving companies unable to meet rising demand, according to a survey by IHS Markit. While purchasing activity rose at the fastest pace in nearly a quarter century of data, manufacturers also ran down inventories of finished goods to the sharpest degree recorded since November 2009.

Euro-Area Factory Bottlenecks Curb Output and Fuel Inflation

Factories lifted their prices by the most in more than 18 years of survey data as they took advantage of the tight market to pass on higher costs to customers.

The industrial sector has propped up the 19-nation euro economy during much of the pandemic, maintaining production when many services had to close. The gradual end of lockdowns around the globe has delivered an extra boost to demand while exposing shortages and transport bottlenecks.

“The economy looks set for strong growth over the summer but will likely also see a sharp rise in inflation,” said Chris Williamson, an IHS Markit economist. “We should also see demand shift from goods to services as economies continue to reopen, taking some pressure off prices but helping to sustain a solid pace of economic recovery.”

IHS Markit’s index of manufacturing activity in the euro zone rose to a record 63.1 from 62.9 in April. An initial estimate was for a slight slowdown in momentum.

Gauges for Asia showed supply problems may persist. Growth there slowed slightly as the region fights flare-ups of the virus.

The OECD said this week that inflation will accelerate in coming months, boosted by higher operating costs and reduced competition as a result of bankruptcies. While it expects those pressures to fade by the end of the year, it it sees “upside risks” in the longer term.

The Paris-based organization raised its 2021 global growth outlook to 5.8%. The euro-area economy, which slid into a double-dip recession over the winter, is seen growing 4.3%.

©2021 Bloomberg L.P.

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