Eurozone growth remains strong in March amid record surge in inflation
The eurozone economy maintained a strong rate of growth in March, easing only slightly from February’s five-month high as looser COVID-19 restrictions continued to accommodate rising levels of business activity. The main impetus to the expansion was provided by the service sector, where growth edged slightly higher, as manufacturing output rose at a softer pace. New orders also increased at a solid rate in March, although new business from export markets deteriorated as the war in Ukraine reportedly impacted cross-border trade.
Business confidence meanwhile took a significant hit, slumping to a 17-month low as rising geopolitical tensions and inflation weighed on the outlook. Amid surging energy, fuel and commodity prices, input cost inflation accelerated to a survey high in March. To combat margin pressures, prices charged for eurozone goods and services were raised to the quickest extent on record.
The seasonally adjusted S&P Global Eurozone PMI® Composite Output Index posted 54.9 in March, a slight decline from 55.5 in February but still indicative of strong growth in business activity across the eurozone. The expansion was driven by the service sector, where output rose at a marginally faster pace than in February. Manufacturing production was also up over the month, although the expansion was the weakest seen over the current 21-month sequence of increases. According to panellists, the upturn was supported by a further loosening of COVID-19 containment measures, which led to higher activity levels at clients and boosted demand for goods and services.
(…) overall inflows of new work increased at a weaker pace than previously. This was partly explained by new export orders, which fell for the first time since November 2020. However, the loss of momentum in total new business growth was particularly pronounced at manufacturers as the war in Ukraine, a renewed flare-up of supply chain issues and steep inflationary pressures weighed on demand for goods. The expansion in new business at services providers was more resilient, but still weakened nonetheless. (…)
Nevertheless, despite an increased number of firms expecting greater headwinds to growth over the coming 12 months, employment levels continued to increase across the eurozone. Moreover, the rate of jobs growth accelerated slightly to a four-month high. The expansion in workforce numbers coincided with a further accumulation in outstanding business. Backlogs of work rose for a thirteenth successive month in March. (…)
The S&P Global Eurozone PMI Services Business Activity Index edged up fractionally to 55.6 in March, from 55.5 in February, signalling a strong rate of expansion in service sector output at the end of the first quarter. Overall, the rate of growth was the quickest in four months.
(…) employment growth accelerated in March to its strongest since last November. Despite the upturn in staffing numbers – which extended the current run of jobs growth to 14 months – the level of outstanding business continued to increase at a solid pace.
Prices data pointed to an intensification of inflationary pressures in March, with both input costs and output charges rising at rates which far surpassed their previous records seen in February.
Chris Williamson, Chief Business Economist at S&P Global:
The outlook for growth has therefore deteriorated at a time when the inflation outlook has worsened. A recession is by no means assured, as the extent to which the economy could suffer in the coming months will depend on the duration of the war and any changes to both fiscal and monetary policy. It certainly seems likely however that the solid expansion seen in March will prove hard to sustain and there is clearly a greater risk of the economy stalling or contracting during the second quarter.
U.S. Factory Orders Decline as Shipments and Inventories Rise in February
Manufacturers’ new orders fell 0.5% (+12.6% y/y) during February following a 1.5% January gain, revised from 1.4%. A 0.6% decline had been expected in the Action Economics Forecast Survey. Transportation equipment orders declined 5.3% (+8.7% y/y), weighed down by a 30.4% fall in orders for nondefense aircraft & parts. Orders excluding transportation increased 0.4% (13.4% y/y) after improving 1.2% in January.
Unfilled orders increased 0.4% (8.4% y/y) in February after a 0.9% rise in January. Excluding transportation, unfilled orders edged 0.1% higher (13.4% y/y) following a 0.5% rise in January. Transportation backlogs increased 0.6% (6.0% y/y) after surging 1.1%. (…)
Inventories of manufactured goods rose 0.6% in February (9.7% y/y) after rising 0.8% in January. Transportation equipment inventories edged 0.1% higher (5.5% y/y) while excluding transportation inventories gained 0.8% (10.8% y/y) after a 1.0% rise in January.
Mercedes-Benz puts 5,600 workers on vacation in Brazil due to chips shortage
Mexican Factories Gain in Supply-Chain Revamps Procurement bids to suppliers in Mexico are surging, says a tech firm that also sees purchasing from China slipping
(…) Last year, large American manufacturers solicited chemicals, produce and construction materials and other goods from six times as many suppliers based in Mexico as they did in 2020, according to procurement software firm Jaggaer. At the same time, the number of suppliers in China that received procurement bids declined by 9% in 2021, Jaggaer said, using data from its 30 biggest U.S. manufacturing customers with an average of over $30 billion in annual revenues.
The push for suppliers in Mexico comes as more companies say they are resetting their supply chains by adding suppliers and bringing some production closer to end users. The effort is aimed at bolstering resilience and reliability following a series of shocks to supply networks brought on by Covid-19 outbreaks, port bottlenecks, extreme weather and geopolitical conflicts. (…)
The added suppliers tend to be closer to the buyer and its customers, he said. The company tracked a 514% increase from 2020 to 2021 in Mexican suppliers receiving bids from its big U.S. buyers and a 155% increase in Latin American suppliers receiving bids over the same period.
At the same time, the company found those manufacturers sought goods from 26% fewer suppliers in the Asia-Pacific region.
A separate survey of 2,000 U.S. and U.K. chief executives by London-based procurement and supply chain consulting firm Proxima Group found that 15% had moved production closer to their home countries or sourced from suppliers in nearby regions, and 26% were looking into doing so. (…)
- John Authers: How to Be a Winner From De-Globalization
(…) The painful irony is that the timing is wrong again. As Mexico’s opening into globalization was overshadowed by China’s, Lopez Obrador is creating an autarky when at last Mexico has another chance to benefit from the global economy. Under the current administration, foreign investors aren’t attracted to Mexico. Mariana Campero shows in the Peterson Institute survey that private flows of investment into Mexico were dwindling even before Lopez Obrador won election and made his massively unpopular decision to cancel Mexico City’s new airport in October 2018. Since then, the country has seen a consistent decline in both private and public investment:
(…) The pattern for the rest of the region is different. Countries like Brazil or Colombia should benefit from higher commodity prices. But the current rally has been driven by de-globalization and constriction of supply, rather than the wave at the beginning of this century that stemmed from globalization and increasing demand. So perhaps it isn’t surprising that Latin American stocks are benefiting far less this time around. (…)
Canada, John?
Treasury Stops Russia From Paying Debt Through U.S. Accounts The decision adds another complication to Russia’s attempts to keep meeting debt obligations.
Ukraine War Sanctions Hit Home for Everyday Russians Russian consumers are skipping big-ticket purchases and planting vegetable gardens to prepare for a long stretch of economic pain.
The first independent data for March showed that Russian factories had their biggest drop in activity since the start of the pandemic. That is a sign that job losses are likely. The European Bank for Reconstruction and Development projected the economy will shrink by 10% this year with no rebound in sight. (…)
Consumers expect prices to rise 18% over the next year, according to a central bank survey taken in March. (…)
The expected increase in unemployment will force the government to boost social spending while funding the war. According to a February survey by state-run pollster VtSIOM, only a third of Russians have savings. The average monthly salary last year in Russia was 56,545 rubles, or approximately $670, according to state statistics agency Rosstat. (…)
In 2020, imports accounted for 75% of sales of nonfood consumer goods in the Russian retail market, according to a study by the Higher School of Economics in Moscow. Studies show the self-sufficiency effort also drove prices higher. (…)
(…) “Life is on pause now,” he says. (…) adding his economic woes pale in comparison to what is happening in Ukraine. (…)
How the Ukraine War Will Likely End
By: George Friedman
(…) The problem, then, is that Putin cannot stop, nor can he reach an agreement with Ukraine that he will keep. Every deal – except for surrender by the enemy – is a revelation of weakness on the part of a weak country and a weak ruler. The only alternatives are ineffective action because the force he sent to war was the wrong force from a country that didn’t have the right one.
He can reach a genuine cease-fire, but if he does, he’s finished. Not being able to defeat the Ukrainians, and held in contempt by others, destroys the myth of his power. Continuing the war endlessly reveals the same thing. As this goes on, Putin’s primary task is to pretend that the defeat is not happening because anything less than victory is a defeat. Every agreement must end in betrayal, and as it happens with guerrillas, they get stronger the longer the war drags out.
A crucial question is whether Russia has strategic reserves. The army has been in the field for over a month, in weather that is still cold, at the end of a logistical line that is problematic. It has been fighting a highly motivated, mobile light infantry force familiar with the terrain. It cannot go on indefinitely. Russia has to rotate its forces. Strategically, it must send more. Instead, it is executing a bloody withdrawal. You don’t fight for the same ground twice unless you have to.
This means that Putin’s war plan is shattered. The resistance has been effective and his troops need a relief he cannot provide. Putin will feint in other directions – perhaps in the Baltics or Moldova – but he lacks the force to fight on another front. He can’t sustain this war easily, especially in the face of NATO soldiers who have so far stayed out of the fray.
Even so, I cannot predict what a leader will do in the end. But for now, it’s clear to me that Putin will cling to power and blame everyone around him. But every day the war goes on, Putin gets weaker. Ukraine should not be able to resist, NATO should not be united, American economic warfare should not be so powerful. Putin is growing more desperate. He has mumbled about nuclear weapons, the sign of utmost desperation.
But he knows he and anyone he may love will die in a nuclear exchange. Even if he is prepared to commit suicide rather than capitulate, he knows that the order to launch must go through several hands, and each of those hands knows that the counterstrike will kill their loved ones. Therein lies the weakness of nuclear war: Retaliating is one thing, initiating another. Putin trusts few people, and he doesn’t know how reliable anyone would be in this situation – nor what the Americans might do if they saw preparation for a Russian launch.
If Putin gives up his position, he is compromised, and perhaps lost. The buzzards are circling. So he must continue to fight until he is forced out and someone else not responsible for the disaster takes over and blames it all on Putin. I think that this can’t end until Putin is pulled from the game.
Obviously, I am moving here away from geopolitical analysis into the political. The former tries to minimize individual influence while the latter emphasizes it. That gives my forecast an inevitable imprecision. But given the situation on the ground, and given Russian internal dynamics, it does seem that all the forces coming to bear on Putin dictate a certain direction. The war will end, but the war is evolving in a way that creates unique pressures on the Russian political system, and, because of the nature of the system, that pressure pivots on Putin.
This is not the only outcome. Ukraine might collapse. Russia might collapse. The Russian army may devise a strategy to win the war. A settlement that is respected might be reached. All of these are possible, but I don’t see much movement in any of these directions. A political end is what I would bet on, with the Russians taking the short end of the stick. I wouldn’t have thought this on the first day of the war, but I think this is likely the shape of the last day.