By Joshua Kirby
The eurozone's economic recovery continued to pick up pace at the start of the second quarter, although growth continues to trail behind the U.S., paving the way for divergence between the world's leading central banks.
Activity in the eurozone's private sector has grown for the second straight month in April, according to a survey of purchasing managers released Tuesday, with Germany returning to growth for the first time in nearly a year.
That followed similar surveys for Japan, India and Australia that also pointed to accelerations in growth during April, indicating that the global economy may be less reliant on the U.S. for growth this year.
A survey to be published later Tuesday is expected to show that activity in the U.S. increased at a more rapid pace than in the eurozone, prolonging an unusually wide growth gap between the two economies.
"If we compare the euro area with the U.S, it's clear that our growth is lower," said Luis De Guindos, vice president of the European Central Bank, in an interview published Tuesday. "The leading indicators in Europe point to a modest recovery in the second half of 2024. But we will have a growth rate of less than 1%, below our potential, which is a very low outcome."
The gap in growth helps explain why the Federal Reserve and the European Central Bank are expected to diverge over the coming months. With inflation easing and the economy still weak, the ECB has signaled it will cut its key interest rate in June, while the Fed is expected to keep its key rate steady until later in the year.
The HCOB Eurozone Composite PMI Output Index--a gauge of activity in the manufacturing and services sectors--rose to 51.4 in April from 50.3 in March, taking the gauge further above the 50 level that indicates expansion.
It was the strongest reading in 11 months, and indicates a faster rate of expansion than economists had expected. That suggests the growth gap between the eurozone and the U.S. may be closing more rapidly than expected.
According to the surveys, the big difference between the two economies is the state of their respective manufacturing sectors. While factory activity in the U.S. continues to expand, the eurozone survey recorded another deep contraction. By contrast, the survey pointed to a rapid expansion in eurozone services activity.
"The upturn is mostly driven by services for now as the real income-led spending recovery may finally unfold," Leo Barincou at Oxford Economics wrote in a note to clients. "Meanwhile, the recovery in manufacturing is yet to really take place."
Continued weakness in the manufacturing sector could derail the eurozone's recovery over the rest of the year, said Christoph Weil, an economist at Commerzbank Research.
"We do not yet share the optimism of the majority of economists and the ECB, who are expecting a fairly strong upturn in the course of this year," Weil said in a note. "The situation in the manufacturing sector remains poor."
Alongside a pick-up in current activity, eurozone businesses also set out a sunny view for the months ahead. The gauge of expectations cooled slightly but remained elevated, having reached its highest level last month since 2022's escalation of the Russia-Ukraine conflict.
After stagnating at the end of 2023, the eurozone economy looks set to have recovered in the first months of 2024, aided by a recovery in real incomes and foreign demand. Economists at JP Morgan estimate the eurozone economy grew at an annualized rate of 0.5% in the first quarter from the previous three-month period, and they expect growth to pick up to 0.8% this quarter. But they estimate the U.S. economy grew by 2.3% in the first quarter, and expect it to grow by 1.5% this quarter.
Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby
(END) Dow Jones Newswires
04-23-24 0509ET
