‘Greedflation’ Makes Survey Cameo, Giving ECB ‘A Headache’

Europe’s factory slowdown worsened in May, even as activity in the services sector continued to expand at a respectable pace, underscoring a bifurcated economy weighed down by German industry.

At just 44.6, the flash print on S&P Global’s manufacturing survey for Europe was the lowest in three years, which is to say the lowest since the bloc’s factories were shuttered during the original COVID lockdowns.

May marked the third straight monthly decline and the 10th contractionary print in 11.

The preliminary read on the country-specific factory gauge for Germany was even worse, at 42.9. That too was a 36-month low.

“The most striking thing is the significant drop in new orders [in Germany], and specifically in foreign demand, which has virtually collapsed,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which publishes the surveys alongside S&P Global, said.

Manufacturing was likewise weak in France, even as 46.1 was an improvement from the prior month’s print. A gauge of services activity was the most tepid since the beginning of the year, albeit still indicative of expansion.

Worryingly for Christine Lagarde and the ECB, the color accompanying the surveys suggested price pressures are still percolating on the services side of the European economy. Indeed, “greedflation” made a cameo. “The discussion about so-called greedflation in Germany may be feuled by the PMI price data in the services sector [where] the upward momentum in input prices has weakened [but] it has increased in sales prices,” de la Rubia remarked.

In other words, firms are seeing less upward pressure on operating costs, but continue to raise prices anyway. “This raises the suspicion that [services sector] companies have been able to increase their profit margins on average and are keeping inflation high,” the release went on to say.

Recall that the ECB is already “suspicious” about that. The bank’s researchers recently flagged it in a paper, noting that “the effect of profits on domestic price pressures has been exceptional from a historical perspective.”

“While, on average, from 1999 to 2022 unit profits contributed around one-third to the GDP deflator, over 2022 they contributed an average of two-thirds,” ECB economists said in April, referencing the visual above.

Taken together, Tuesday’s surveys from S&P Global paint a somewhat disconcerting picture for policymakers. Services activity is healthy, but that’s where the inflation lives, and at least some firms may be opportunistically inflating their bottom lines with price hikes not related to input costs. At the same time, very soft readings on the manufacturing side make the stagflation case, particularly given how important German industry is for the bloc.

The good news is that European firms are generally still hiring, but that comes with the usual caveat: Robust labor demand can be conducive to wage-price spiral dynamics or, if you’re in the greedflation camp, you can call it a price-wage loop.

De la Rubia described the releases as “a headache” for the ECB. “Selling prices in the services sector actually rose more than in the previous month, and it is precisely price developments in this sector that the ECB is watching with a wary eye,” he said.


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