Europe’s Recovery Threatened by Supply-Chain, Inflation Squeeze

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Businesses in France and Germany reported solid growth this month, but also warned of threats to the outlook in the form of shortages of raw materials, delivery delays and rising costs.

In Germany, input prices for manufacturers rose at a record pace, and supply bottlenecks constrained production, according to IHS Markit’s monthly business survey. French companies reported similar delay issues, which pushed up their costs.

Rising prices and supply-chain issues have been one of the dominant stories of the year. The rapid reopening of economies from Covid-19 lockdowns has led to surging demand for raw materials, leading to shortages across multiple industries.

Germany’s overall measure of private sector activity -- the composite Purchasing Managers’ Index – still strengthened in July, rising more than economists forecast to 62.5 from 60.1. That’s the highest since the series began in 1998.

But the composite number for France unexpectedly declined to 56.8 from 57.4.

European Central Bank President Christine Lagarde noted that bottlenecks are holding back production when she spoke to reporters on Thursday after a policy meeting, and said there is “a long way to go before the damage to the economy caused by the pandemic is offset.” The ECB reinforced its pledge to keep pumping in monetary stimulus, promising not to withdraw support prematurely.

Business in both France and Germany passed on the latest cost increases to customers in higher prices, according to Markit. Worries about future production meant confidence declined from record levels reached in June.

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