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EUROPE ECONOMY-European factories started second quarter at lively pace
May 2, 2017 / 10:11 AM / 5 months ago

EUROPE ECONOMY-European factories started second quarter at lively pace

* European factories had strong start to Q2

* Euro zone manufacturing activity at six-year high

* British factory growth at three-year high

* Inflationary pressures remained elevated

By Jonathan Cable

LONDON, May 2 (Reuters) - European manufacturers began the second quarter at a brisk pace, with the euro zone’s factories increasing activity at the fastest rate in six years and Britain’s still benefiting from a weak currency, surveys showed.

The upbeat surveys come ahead of presidential elections in France, the outcome of which has the potential to bring an end to the currency bloc, and as Britain and the European Union begin divorce negotiations.

IHS Markit’s Manufacturing Purchasing Managers’ Index for the euro zone jumped to 56.7 in April from March’s 56.2, reaching its highest level since April 2011. The figure was one tick down from a preliminary reading of 56.8.

Manufacturing growth in Germany, France and Italy, the bloc’s three biggest economies, was up near a six-year high, earlier data showed. Spanish activity accelerated.

“The manufacturing sector is thus showing strong momentum at the start of (the second quarter), which is likely to carry on in the near term,” said Raphael Brun-Aguerre at JP Morgan.

Increasing demand came despite factories raising prices at the second-fastest rate in nearly six years. Signs that ultra-loose monetary policy is paying off, with solid growth and inflationary pressures, will be welcomed by the European Central Bank.

Official data last week showed inflation rose more than expected in April, returning to the ECB’s target, and a Reuters poll suggested the central bank’s next move would be to tighten policy.

Pressure is mounting on the ECB to start dialling back its lavish stimulus, but last week it kept its policy stance steady, even leaving the door open to more easing, arguing underlying inflation is not showing any signs of a convincing upward trend.

While markets expect it to tone down the language in June, removing a bias for further easing, ECB President Mario Draghi gave no hint of such moves on Thursday, only venturing to say economic risks have receded.

In another piece of upbeat news on Tuesday, official data showed unemployment in the euro zone held steady at 9.5 percent in March, its lowest since April 2009.

Growth in the currency bloc will be steady but modest in the coming year, an April Reuters poll of economists showed, although that forecast was partly contingent on independent candidate Emmanuel Macron winning the French presidency this weekend.

Opinion polls have showed Macron winning what is widely seen as France’s most important election in decades. His opponent, far-right candidate Marine Le Pen, plans to quit the EU and the euro although she has recently said it might not be her top priority.

MAY‘S BOOM BOON

Since a referendum last year in which British voters opted to leave the EU, the UK economy has fared much better than feared and the latest PMI suggested that momentum has so far continued.

The IHS Markit/CIPS UK Manufacturing PMI surged to a three-year high of 57.3 from March’s 54.2, exceeding all forecasts in a Reuters poll of economists which had pointed to a slight decline to 54.0.

“After last week’s surprisingly-downbeat Q1 GDP figures, then, today’s survey provides us with optimism that the manufacturing sector should play a bigger role in offsetting the slowdown in the consumer services sector ahead,” said Ruth Gregory at Capital Economics.

These figures may be a boon for Prime Minister Theresa May ahead of a June 8 snap election, after official data last week showed the economy slowed sharply in the first three months of the year as inflation hit consumers.

May’s Conservative Party has a big lead over the opposition and if opinion polls are right will win the strong new mandate she says she wants to help her negotiate a good deal for Britain outside the European Union and its single market. (Additional reporting by Andy Bruce; Editing by Mark Trevelyan)

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