Europe's Manufacturing "False Boom" Cannot Conceal the Economic Chill: PMI Shows Both Extremes of Boom and Bust

Huitong Finance APP News — On Tuesday (March 24), during the Europe-Asia trading session, various European countries released manufacturing PMI data, which overall exceeded expectations. However, the currency market did not get support; currently, the euro against the dollar is falling back, trading around 1.1592, and European stock markets have not shown significant gains.

S&P Global HCOB March PMI preliminary figures are officially released. The eurozone and UK economies show extreme structural divergence: manufacturing sectors collectively outperform expectations and continue to expand, while services weaken across the board, dragging the composite PMI down.

Middle Eastern geopolitical conflicts have driven up manufacturing optimism through defense orders and preemptive stockpiling, but also increased corporate costs and suppressed end-user demand. The stagflation warning has been further sounded, and the euro exchange rate faces a dual test from data and geopolitical tensions.

Data shows that the eurozone’s March composite PMI preliminary reading is 50.5, a significant decline from February’s 51.9, and below market expectations of 51.1. The overall growth rate of the private sector has slowed sharply. Structurally, the divergence is especially prominent: services PMI plummeted to 50.1, below expectations of 51.0 and February’s 51.9, becoming a core drag on the economy; manufacturing PMI, on the other hand, rose against the trend to 51.4, far exceeding expectations of 49.4 and significantly rebounding from 50.8.

Core eurozone countries’ manufacturing performance exceeded expectations across the board: Germany’s March manufacturing PMI surged to 51.7, well above the expected 49.5 and further strengthening from 50.9, continuing the expansion trend; France’s manufacturing PMI was 50.2, above the expected 49.5 and slightly up from 50.1, remaining above the growth threshold.

The UK economy also shows a “strong manufacturing, weak services” pattern: March’s composite PMI fell to 51.0 from 53.7 in February; services PMI dropped to 51.2, far below the previous 53.9; manufacturing PMI was 51.4, slightly down from 51.7 but significantly above the expected 50.1, maintaining steady expansion.

Manufacturing defies expectations: defense-driven “wartime mobilization” and stockpiling hype

The unexpected expansion of manufacturing in the eurozone, UK, Germany, and France is not driven by a recovery in consumer spending but mainly by wartime mobilization effects amid geopolitical conflicts.

In March, new orders in European manufacturing hit a near two-year high, driven mainly by the escalation of Middle Eastern conflicts. Countries like Germany, France, and Poland have accelerated military replenishment, with tank parts, drone components, and ammunition production lines operating at full capacity, directly boosting manufacturing output and order segments.

The UK, leveraging NATO’s critical logistics position, saw explosive growth in aerospace and defense industrial orders in March, effectively offsetting the impact of high inflation on retail and other sectors, serving as a key support for manufacturing stability.

Meanwhile, preemptive stockpiling and logistical delays artificially elevated PMI readings. Concerns over the Suez Canal blockade and attacks on energy facilities led European companies to abandon just-in-time (JIT) models, massively stockpiling raw materials. These procurement activities are directly included in the PMI inventory component, making the data appear more active.

Supplier delivery times, as an inverse PMI indicator, have been significantly extended due to logistics disruptions caused by geopolitical conflicts. In weighted calculations, this has artificially boosted the overall PMI, not reflecting healthy supply-demand balance but rather supply chain disturbances that mask the true weakness in end-user demand.

Rising input prices: stagflation risks become fully apparent

The most warning-significant aspect of the March PMI is the sharp rise in input price indices, with stagflation characteristics becoming more evident.

Affected by the uncertainty in Middle Eastern affairs, energy price expectations have gone out of control. Companies rushed to place orders before raw material prices surged, creating a false appearance of expansion but pushing cost pressures out of control.

S&P Global chief business economist Chris Williamson directly states that the Middle Eastern conflict is simultaneously pushing up prices and suppressing growth, ringing alarm bells for stagflation in the eurozone. The conflict-driven surge in energy prices and shipping disruptions have caused companies’ cost growth to reach a three-year high, with supplier delivery delays hitting their highest since mid-2022.

UK companies more directly attribute business losses to geopolitical disturbances, with risk aversion among clients tightening, high prices, high interest rates, and supply chain disruptions jointly suppressing economic activity.

Summary and technical analysis:

Manufacturing PMI in Germany, France, and the eurozone exceeded expectations, providing short-term support for the euro; however, persistent weakness in services, a declining composite PMI, and rising stagflation risks will exert downward pressure on the euro.

Compared to short-term PMI fluctuations, the ongoing developments in the Middle East remain the core factor influencing EUR/USD movements.

Geopolitical risks causing energy price volatility and supply chain disruptions will continue to influence Europe’s economic recovery prospects and ECB policy expectations, ultimately determining the euro’s medium-term trend.

Technically, after forming a triple top, EUR/USD has entered a correction, finding solid support below at 1.1500.

(EUR/USD daily chart, source: Huitong Finance’s Yihuitong)

As of 19:33 Beijing time, EUR/USD is quoted at 1.1594/93.

(End of report)