It’s a modest improvement amid better fortunes in France and Germany especially. Of note, the manufacturing output index rose to 50.5 – crossing the threshold for growth. The reading is a 34-month high, with this being the first monthly rise in output in two years. That said, it is just a marginal one with overall activity still struggling. Employment conditions were softer again and that’s a concern alongside a further drop in business confidence as well. HCOB notes that:

“Things are looking up. The PMI has increased for the third month in a row and the output index even surpassed the
threshold for growth. A significant part of this movement may have to do with the frontloading of orders from the U.S. ahead
of the tariffs, which means some backlash is to be expected in the coming months. However, given the geopolitical
developments, there is also increasing speculation that the defense sector will expand significantly over the next few years,
with direct and indirect positive effects on the industry.

“Inflation in manufacturing remains subdued. However, it is remarkable that input prices increased a touch stronger, even
though oil and gas prices fell significantly in March. This might indicate that prices of other input factors rose. The ECB will
monitor this closely, as inflation has decreased over the last few years mainly due to lower goods prices, while services
inflation has remained stubbornly high. If goods prices were to increase continuously, this would complicate the inflation
picture.

“The tide may be turning, albeit slowly. New orders are barely falling anymore, fewer people are being laid off, and input
purchasing reductions are happening at a much slower rate than a few months ago. Given the relatively low capacity
utilization in the industry, as shown by official statistics, we would expect any additional public sector spending in the
defense sector and adjacent areas to be very effective in generating growth without dramatically increasing inflation.

“While the PMI has increased in the leading Euro countries Germany and France, Italy has fallen behind and the former
poster child Spain is below 50 for the second month in a row. There is some hope that fiscal spending in Germany will not
only increase significantly but also spread to other countries, boosting their growth rates as well. This speculation is not
unjustified, but most likely to be felt only in 2026 and later.”