The eurozone economy trailed the US during the post-Covid recovery, with US growth clearly outpacing that in the eurozone. More recently, however, the gap has narrowed, with the growth-inflation mix in the eurozone catching up.
Using the purchasing managers index of the manufacturing sector as a proxy for the wider economy, and setting that against pressures for higher wages, recent data shows the eurozone manufacturing PMI recovering on the back of moderating wage growth (see exhibit 1). The manufacturing PMI rose to 47.3 in May from 45.7 in April, marking the highest reading since March 2023.
With labour market conditions a key variable for the European Central Bank’s assessment of inflationary pressures, and moderating wage gains boding well for Europe’s inflation outlook, the market’s view that the ECB will cut interest rates at a faster clip than the US Federal Reserve appears justified.
