FRANKFURT (Reuters) – Services activity in the euro zone could weaken further in coming quarters due to rising interest rates, but the impact of these increases on the sector could be more moderate than on manufacturing industry, concluded a study by the European Central Bank (ECB) on Tuesday.
The manufacturing sector was in recession for most of 2023 as a result of monetary tightening, but demand for services remained relatively robust, driving growth in the sector.
The situation could normalize, because service activity tends to align with that of the manufacturing industry with a lag of two quarters, notes the ECB.
“The dynamics of the manufacturing industry contain relevant information for the short-term dynamics of services, and therefore for the rest of the economy,” summarizes the ECB in an article in the Economic Bulletin. “The manufacturing sector seems to lead services (…) while no clear correlation can be established in the opposite direction.”
The industry’s high capital intensity explains the sector’s faster response to rate increases, starting in the third quarter of 2022.
The ECB also specifies that the impact of its monetary policy on services should be less significant.
“Monetary policy shocks have an impact on the manufacturing industry which is almost twice as strong and which is transmitted approximately two quarters in advance compared to the transmission to services,” added the ECB.
(Report by Balazs Koranyi, Corentin Chappron, edited by Blandine Hénault)
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