Eurozone Recovery is Over: Deflationary Pressures Intensify as Growth Slows

ECB president Mario Draghi has his work cut out for him as deflationary pressure in Europe intensify. Average prices charged by companies for their goods and services fell at the steepest rate for a year as firms competed to boost sales.

Markit reports Eurozone Growth Lowest in Over a Year and Prices Fall Further.

Growth Wanes Slower

Business activity in the eurozone grew at the slowest rate for over a year in February and deflationary pressures intensified, according to flash PMI® data. The flash Markit Eurozone PMI fell from 53.6 in January to 52.7, the lowest since January of last year. The second consecutive monthly slowing in the rate of output expansion reflected a waning in growth of new order s for a third successive month, resulting in the smallest rise in new business for 12 months.

Manufacturing output showed the smallest increase since December 2014, moving closer to stagnation amid a further faltering in growth of new orders and exports. Services fared better, though nevertheless saw growth weaken to t he slowest since January of last year.

Price Fall Intensifies

Deflationary pressures meanwhile intensified. Average prices charged by companies for their goods and services fell at the steepest rate for a year as firms competed to boost sales. Average input costs fell marginally for a second successive month, the first back-to-back monthly decline since the spring of 2013.

Manufacturing prices fell especially sharply, with purchase costs dropping to the greatest extent since July 2009 on the back of low global commodity prices and intense competition among suppliers. Suppliers’ delivery times, a key gauge of capacity utilization, pointed to the weakest supply chain pressures since July 2013.

Factory gate prices showed the largest monthly fall since June 2013. Input costs in the service sector continued to rise but prices charged fell at a slightly sharper (though relatively modest) rate, reflecting stiff competition and weak demand. The divergence points to squeezed margins.

Eurozone Recovery is Over

Fighting routine price deflation is of course ridiculous, but that’s not the way central bankers think. Japan’s negative interest policy recently backfired, and additional measures by the ECB will fail as well.

For discussion please see Safes Sold Out in Japan: Customers Hoard Cash in Response to Negative Rates.

There’s no reason to believe further negative rates will help the Eurozone, but central banks never learn from mistakes.

Regardless, Kiss the Eurozone recovery goodbye. It’s over.

Mike “Mish” Shedlock