Euro-area recovery boosted by services as industry loses steam

Bloomberg

The euro area’s economic recovery is increasingly being supported by a rebound in services as factories confront a supply squeeze that is pushing up costs.
Surveys of purchasing managers by IHS Markit show the 19-nation region emerging from the pandemic crisis as infections drop and the lockdowns that dragged the bloc into a double-dip recession are eased.
Service-sector businesses, which were among the hardest hit by restrictions, saw activity grow by the most in nearly three years in May. An acceleration in vaccinations and strengthening demand are translating into greater optimism for the year ahead.
At the same time, manufacturing slowed slightly amid shortages and transport bottlenecks. Backlogs of work rose by the most since the data series began in 2002. That threatens to hold back the recovery, while also driving up prices.
“Growth would have been even stronger had it not been for record supply-chain delays and difficulties restarting businesses quickly enough to meet demand, especially in terms of rehiring,” said IHS Markit Chief Business Economist Chris Williamson.
The European Central Bank will meet next month to decide whether it should slow the pace of the emergency bond-buying program, which was accelerated this quarter to counter upward pressure on borrowing costs from the faster US recovery.
IHS Markit said price pressures on goods are highest it has ever recorded, and that services prices are also mounting. ECB policy makers have insisted that the trend is temporary, and that economy still needs considerable support to sustain recovery.

“The shortfall of business output relative to demand is running at the highest in the survey’s 23-year history,” said Williamson. “How long these inflationary pressures persist will depend on how quickly supply comes back into line with demand.”