Chart of the week - Eurozone manufacturing: big gains ahead

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● Near-term risks: Many countries in the Eurozone are extending and tightening restrictions to contain the spread of the B.1.1.7 variant of the SARS-CoV-2 virus first detected in southern England. The slow vaccination progress in Eurozone countries makes it difficult to predict the precise timing of when economies will begin to reopen. While the US economy is already roaring ahead and the UK looks set to follow suit, albeit from a much lower base, the near-term risks for the Eurozone are still tilted to the downside. We expect no more than a 1.8% qoq gain in Eurozone GDP in Q2 after a 1.6% fall in Q1, well behind the US with a 2.8% gain and the UK with a 5.0% qoq bounce.

● Four reasons for optimism: We should put these near-term travails into perspective, however. 1) The number of daily recorded SARS-CoV-2 infections per capita in the Eurozone has so far increased to some 40% of the US and UK peaks of early 2021. 2) With a rise in vaccine supply, many EU countries can probably give the jab to almost as many people in the five weeks after Easter as they did in the first three months of 2021 taken together. 3) Survey and mobility data suggest that Eurozone economic activity started to pick up strongly in March. This points to solid underlying momentum that will come to the fore again once the April restrictions can be eased in coming months. 4) The outlook for Eurozone manufacturing could barely be more auspicious, at least in terms of demand.

● The beating heart: Manufacturing matters. It generates 16.4% of Eurozone gross value added. Record increases in the readings for output, new orders and exports pushed the Eurozone PMI index for manufacturing from 57.9 in February to a new high of 62.5 in March. Whereas the fiscal stimulus in the Eurozone is more measured than in the US, the export-orientated Eurozone stands to benefit more than many other regions from the strength in global trade powered by the rebound in global consumer demand, business investment and a need to replenish inventories. As usual, the US and Chinese stimuli are spilling over into the Eurozone, directly by fuelling US and Chinese imports and indirectly by lifting global sentiment and hence global demand for the high-end investment goods which the Eurozone sends to the world.

● Supply constraints: Strong demand is not yet showing up in the hard data for production, though. Whereas orders in German manufacturing edged up in February, output in the sector fell by 1.75% mom – see chart – as a lack of semiconductors caused a 7% mom plunge in the production of cars and car parts. In France, the 8.3% mom drop in car output also contributed heavily to the 4.6% mom decline in manufacturing output after a solid 3.3% gain in January. As these supply constraints ease over time, output will likely advance strongly in coming months.

● Temporary distortions: Lockdowns weighing on parts of the service sector and supply chains in manufacturing that cannot yet fully cope with the surge in demand are not the only temporary factors holding back activity. For example, a spell of unusually frosty weather contributed to a 7.4% fall in German construction output in January and February relative to the Q4 average. The advent of warmer weather should help. With luck, it will underpin not only a rebound in construction in the March and April data but also an easing of pandemic risks from May onwards. If so, gains in manufacturing, construction and services could add up to solid economic growth soon after a weak start to the year.

Holger Schmieding

Chief Economist

+44 20 3207 7889

holger.schmieding@berenberg.com

Kallum Pickering

Senior Economist

+44 20 3465 2672

kallum.pickering@berenberg.com

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