Durable goods output declines in France, Italy, and Ireland
Eurostat said industrial production fell 0.2% in May compared with the previous month, following an upwardly revised 0.3% increase in April. Economists polled by The Wall Street Journal had expected a 0.2% rise.
The decline in durable consumer goods production drove the monthly drop, the agency said. Output in France and Italy fell, and Ireland recorded a steep decline, outweighing gains elsewhere.
Despite the monthly decline, industrial output in May remained above its February level, when the conflict between the U.S. and Iran began, according to the data.
“Industrial production in the eurozone continues to trudge along at a sluggish pace without clear direction,” Bert Colijn, senior economist at ING, said in a note. Still, the decline is a modest one, he added.
The industrial data follows surveys pointing to a gradual loss of momentum in European factories. The S&P Global eurozone manufacturing purchasing managers index fell to a two-month low in May, with input costs rising at their fastest pace since May 2022, and the index slipped further in June.
Until May, manufacturing activity had continued to outperform expectations since the outbreak of the conflict, according to the report. Some producers benefited from customers bringing forward orders to get ahead of potentially higher prices and supply shortages, while disruption to Asian competitors supported demand for European manufacturers.
“This keeps manufacturing production decent for the moment and also results in some muted optimism about the outlook despite continued uncertainty around the Middle East conflict,” Colijn said.
Eurozone gross domestic product contracted in the first three months of the year, with geopolitical uncertainty raising concerns that the economy could slip into a recession in the second quarter. Services output, which accounts for the bulk of eurozone economic activity, rose 0.7% in April, providing some offset.
For the European Central Bank, a resilient economy could provide more room to combat inflation, with higher interest rates less likely to raise growth concerns. The ECB raised rates last month, warning that the conflict in Iran could drive up costs and create broader price pressures.
A breakthrough in talks between Iran and the U.S. in June provided some relief for Europe’s energy-intensive industries, though renewed tensions in recent days risk prolonging uncertainty over energy costs and supply conditions, according to the report.
“Hopes for more geopolitical stability, lower energy prices and strong public investment seem to drive optimistic views for now,” Colijn said. “The latter seems more of a sure bet than the first two, with Middle East uncertainty back on the table.”