European manufacturers boom ahead of Theresa May's Brexit speech and German elections

A Volkswagen employee in Dresden
German manufacturing is booming. Pictured: A Volkswagen employee in Dresden

Manufacturers in the Eurozone enjoyed strong growth last month, strengthening the EU’s bargaining hand in Brexit trade negotiations ahead of Theresa May’s speech in Florence today.

IHS Markit’s composite purchasing managers index (PMI), a closely watched barometer of economic health, rose to a four-month high of 56.7 in September. Any reading above 50 indicates growth in a sector.

France and Germany led the charge, with German manufacturers' PMI rising to 57.8 in September from 55.8 in August. Economists had been expecting a small fall to 55.6.

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Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, attributed the eurozone's momentum to strong order books.

"Output and new orders are rising briskly," he said. "Meanwhile, private sector activity in both services and manufacturing remain strong enough to increase work backlogs and increase employment."

Mr Vistesen added that he expected unemployment levels to fall further towards the end of the year.  

As the European Central Bank looks to cease its bond-buying activities, these figures could make the ending of its quantitive easing programme even more likely.

“The rise in business activity and accompanying build-up of price pressures will fuel expectations that the ECB is poised to announce its intention to rein back some of its stimulus, reducing its asset purchases in 2018,” said Chris Williamson, chief business economist at IHS Markit. 

Merkel at conference
Angela Merkel is tipped to win the German elections Credit: Steffi Loos/Getty images

At the same time the Confederation of British Industry's industrial trends survey showed UK manufacturers' growth slowing a little, with 24pc of companies reporting stronger than usual order levels and 17pc reporting weaker orders.

That gives a net balance of 7pc, down from the 13pc recorded last month and below the 11pc expected level.

Export demand did hold up more firmly, however, indicating that strong economic growth overseas is helping British companies to grow.

“The outlook for manufacturing appears mixed with a promising export environment countered by challenging-looking domestic conditions," said economist Howard Archer at the EY Item Club.

"On the export side, a very competitive pound and healthy global demand should buoy UK manufacturers competing in foreign markets. The weakened pound could also encourage some companies to switch to domestic sources for supplies, which would help manufacturers of intermediate products.

“On the domestic front, increased prices for capital goods and big-ticket consumer durable goods, weakened consumer purchasing power, and economic and political uncertainty threaten to hamper manufacturers. Businesses’ willingness to invest and buy capital goods is being tested by economic, political and Brexit uncertainties.”

The euro has risen in value in recent weeks, sparking concern among some investors that a pricier currency might have a chilling effect on the region's economic health.

Julien Lafague, European equities strategist at JP Morgan, said such fears were misplaced. "We view the strength in the single currency as the reflection of an improving growth outlook, which justifies a gradual normalisation of the ECB’s extremely accommodative policy," he said.

With German elections looming over the weekend, analysts speculated the figures may go some way to strengthen the likely reinstatement of Angela Merkel as Chancellor, with the focus turning to the precise make-up of her expected coalition government.

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