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Optimism rises in European industry

European manufacturers are more optimistic that they will be able to raise output, profits and employment in 2007 than they were a year ago, raising the likelihood of interest rate rises, according to a survey to be published on Wednesday.

The momentum with which the European economy entered the new year has rubbed off on manufacturing companies. They now express greater confidence that their factories are likely to operate at higher capacity and that they will be able to raise the prices of the goods they sell. But big differences exist within Europe. France is noticeably pessimistic, with only 17% more manufacturers expecting higher sales in the next year.
In the most confident country, the Netherlands, the equivalent balance of optimism was 80%. The European average was 50%. A combination of higher output and rising prices would give the European Central Bank ample reason to continue increasing interest rates. Both the ECB and the Bank of England pay close attention to the monthly pan-European purchasing managers’ indices, published by the consultancy NTC Economics, which provide good quality information on economic conditions. NTC’s twice-yearly business outlook survey of the same companies provides a picture of how companies are planning for the future.

Manufacturers are notably more optimistic than at the start of 2006, with 60% of them expecting sales values to rise and only 10% thinking they will fall. The net balance of 50% compares with 40% at the start of 2006 and 43% last July. „The European manufacturing growth engine clearly has plenty of petrol left in the tank,” said Luke Thompson of NTC.
He added: „All of this will please economists and policymakers looking for evidence of more self-sustaining eurozone and EU growth through 2007, and positive contributions from business investment and overall employment levels.” With concerns about input costs a little more muted than in July, when oil prices were rising, the net balance of companies expecting a rise in profits is 27%, up from 20%. There has been a sustained increase in the proportion of companies expecting to increase employment, with a net balance of 17%.
The projected rise in employment would continue a trend in Europe of rapid increases to the labor force. Official German figures yesterday showed that in the Q4 of the year 452,000 more people were in employment than a year earlier. The relative pessimism of French manufacturers reflects concerns about the economy’s ability to compete. Official figures show the economy grew by a healthy 0.6% in the fourth quarter of 2006, but growth for the whole year was lower than that in Germany for the first time since 1994. (