Key Takeaways
Eurozone industrial output rose again in April as manufacturers rushed to fulfill orders from customers seeking to lock in supply ahead of potential disruptions from the Middle East conflict.
Eurozone industrial production increased in April, Eurostat data showed Monday, extending a recovery as factories worked through a backlog of orders placed by clients anxious to avoid price increases and shortages tied to the war in the Middle East. The data was released the same week the European Central Bank raised its key deposit rate by 25 basis points to 2.25 percent, its first hike since 2023, as the energy price shock from the closure of the Strait of Hormuz pushed inflation higher.
"The production pickup reflects a preemptive inventory build by manufacturers and their customers, who are trying to get ahead of supply-chain bottlenecks," said James Okafor, macro analyst at Edgen. "The question is whether this is a temporary pull-forward of demand or the start of a sustained recovery."
The industrial sector has been under pressure since the Strait of Hormuz closure disrupted energy supplies and pushed Brent crude above $90 a barrel earlier this year. Brent has since fallen to $83 a barrel after the US and Iran reached a tentative agreement to reopen the waterway, with a formal signing scheduled for June 19 in Switzerland. Eurozone shares rose 2.1 percent Friday on optimism over the deal.
The ECB's rate hike last week — its first since July 2023 — reflected the challenge major economies face from higher energy costs. The central bank raised its inflation forecasts and cut its growth projections, with President Christine Lagarde striking a moderately hawkish tone that analysts said left the door open for another hike, possibly in September. DZ Bank analyst Christian Reicherter said the bank does not expect a move in July but sees a hike after the summer break.
What the Data Means for the ECB
The industrial production data is a lagging indicator, but it provides the ECB with evidence that the economy was showing some resilience in April even as the conflict weighed on sentiment. The German ZEW economic sentiment index, due Tuesday, will offer a more forward-looking gauge of how businesses are assessing the outlook.
The ECB now faces a delicate balancing act: raising rates to contain inflation driven by energy costs without choking off the recovery that industrial production data is beginning to signal. Markets are pricing in a roughly 65 percent probability of a Fed rate hike by December, down from 80 percent before the US-Iran deal announcement, according to LSEG data.
If the Strait of Hormuz reopens as scheduled, the decline in energy costs could ease some of the inflation pressure that prompted the ECB to act. But the central bank's updated forecasts already assume higher inflation for longer, and any sustained recovery in industrial output could give policymakers confidence that the economy can absorb further tightening.
This article is for informational purposes only and does not constitute investment advice.
