Euro zone factory output returned to growth in February -PMI

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Nikos Ballas, 31, works on at Cosmos Aluminium factory in Larissa, Greece, July 8, 2021. Picture taken July 8, 2021 REUTERS/Alexandros Avramidis

LONDON, March 1 (Reuters) - Overall activity in the euro zone's manufacturing sector contracted again in February but output increased for the first time since May as supply chains continued to heal, a survey showed on Wednesday.

S&P Global's final manufacturing Purchasing Managers' Index (PMI) dipped to 48.5 in February from January's 48.8, in line with a preliminary reading but still below the 50 mark separating growth from contraction.

However, an index measuring output, which feeds into a composite PMI due on Friday that is seen as a good guide to overall economic health, was just above breakeven at 50.1 compared to January's reading of 48.9.

"A marginal expansion of output reported by euro zone manufacturers in February is welcome news in representing the first increase since last May and a further improvement in the underlying trend from the low seen back in October," said Chris Williamson, chief business economist at S&P Global.

"The brighter production picture first and foremost reflects a broad-based improvement in supply chains, with deliveries of inputs into factories quickening on average to a degree not seen since 2009."

That healing of supply chain strains led to another sharp diminishing of the cost burden faced by factories. The input prices index slumped to 50.9 from 56.3 in January, its lowest reading since September 2020. However, the output prices index remained high.

"Although factory selling prices continued to rise sharply, albeit with the rate of increase easing to a two-year low, this in part reflects the usual lagged effect of changes in costs feeding through to output prices," Williamson said.

Any signs of easing price pressures will likely be welcomed by policymakers at the European Central Bank who have failed to get inflation anywhere near their 2% goal despite having embarked on the most aggressive interest rate hiking policy since the Bank's formation.

Another 50 basis point increase to the ECB's deposit rate this month is a done deal, according to economists polled by Reuters, who expected an additional 25 basis point lift next quarter to give a terminal rate of 3.25%.

Reporting by Jonathan Cable; Editing by Susan Fenton

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