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Key takeaway from the euro area manufacturing PMI readings today

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Supply disruptions start to weigh on economic activity

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The euro area has seen a rather resilient bounce in overall conditions in Q2 and things are still holding up in July as seen with the elevated PMI readings earlier.

That said, there is a slight loss in growth momentum and while part of that may be due to pent-up demand easing, it is also to do with supply chain disruptions starting to become more of an issue for businesses.

The two major issues caused by that are capacity constraints and high cost inflation pressures, in which the latter will likely be passed on to the consumer side.

Perhaps in the early stages, businesses can still cope with these issues but the more it becomes persistent and the less it is “transitory”, that will impact economic activity more so than what we’re seeing with the minor hiccup in July.

This will be a key spot to watch in terms of how most major economies can cope with sustaining the recovery pace after reopening the economy.

I shared some thoughts on this and inflation back in May:

But another key factor to consider is the recent tightening in supply chains that have led to higher input and output costs across the globe. The strained supply is contributing to a bit of a feedback loop, which could keep price pressures higher for some time.

The fact that companies see supply chains being strained makes them just want to bring forward orders in case demand returns (amid the economic reopening, vaccine progress), which in turn strains supply conditions even further – and the cycle repeats itself.

The higher input and output costs will eventually feed into consumer inflation one way or another and there aren’t any quick solutions for this.

The only way things will normalise is when trade conditions in general also experience some normalcy and get back to the way things were. But that requires more of a synchronised recovery/reopening across the globe more than anything else.

Until then, business and companies may continue to face such supply constraints and that could very well keep these elevated price pressures more persistent in the next year or so.

As mentioned, the key looks to be a synchronised recovery/reopening across the global economy but given the virus situation, that is still not taking off just yet.

As such, it is going to be a battle between issues caused by supply chain disruptions and economic resilience moving forward.

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