Resilient Europe
Eurozone economic activity gained momentum more rapidly than anticipated, with manufacturing returning to expansion for the first time since October, despite a slight shortfall in the services sector relative to expectations. The HCOB Flash Eurozone Composite PMI rose to 51.9 in February from January’s 51.3, beating forecasts of 51.5.
Manufacturing showed a notable turnaround, with the headline PMI increasing to 50.8 from 49.5 and the output index reaching a six-month high of 52.1. The improvement was largely driven by a rebound in demand, as evidenced by the factory new orders index moving up to 50.9 from 49.2.
Although still early to draw firm conclusions, this may signal a potential inflection point for the manufacturing sector. The services sector recorded a marginal gain, with its PMI edging up to 51.8 from 51.6, slightly below the forecasted 51.9
UK inflation hits lowest in nearly a year
UK inflation has eased to its lowest level since early last year, reinforcing expectations for a rate cut by the Bank of England, even though underlying price pressures remain relatively persistent.
After a sharp rise to 3.4% in December, headline inflation slowed to 3% year on year, largely due to softer increases in transport, non-alcoholic beverage and food prices, the latter category of which the bank monitors closely because of its influence on household inflation expectations.
Core inflation also moderated, though at a slower pace, slipping to 3.1% from 3.2%, its weakest reading since 2021. If inflation continue to dissipate, and labour market conditions weaken further, market expectations will rise further for a rate cut.
US stronger production
Industrial production registered a solid 0.7% month-on-month rise in January with a 0.6% increase in the largest subset of manufacturing production.
Although this has exceeded expectations, the sector’s overall trajectory remains only modestly firmer than a year ago and still below pre-pandemic levels. Stronger January production is consistent with an increase in ISM manufacturing production.
Strength in activity has been particularly observed in durable goods production such as computers and electronics likely related to AI-investment demand coupled with the support of the tax incentives for business investment included in legislation of the OBBBA in mid-2025. Strong orders may continue to support production in coming months.
Productivity in the sector seems to have improved, as hours worked in the manufacturing sector declined while output has picked. Given the sensitivity of the sector to changes in interest rates, rate cuts could further support the manufacturing activity.
This article does not constitute legal and, or financial advice and is being issued for information purposes only by Bank of Valletta plc, 58, Zachary Street, Valletta. Bank of Valletta is a public limited company regulated by the MFSA and is licensed to carry out the business of banking and investment services in terms of the Banking Act (Cap.371 of the Laws of Malta) and the Investment Services Act (Cap.370 of the Laws of Malta).
