The European industry faces the crisis but feels the inflationary pressure

The European manufacturing industry is bracing for the crisis, but it also accuses rising inflationary pressure. In Spain, the manufacturing sector accelerated in October, but its progress is threatened by increasing cost pressures due to "high energy prices." The balance of activity in the manufacturing sector turned positive in October for both Spain and the eurozone, showing resilience in an adverse scenario marked by the unresolved conflict in the Middle East, Trump's tariff war, supply chain disruptions, and the current energy shock.

Despite the ongoing conflict, Europe and Spain continued to expand production volumes in October, with Spain speeding up the pace. The Spanish manufacturing PMI rose to 52.2 points, up from 51 in September, marking its fastest growth in over a year and registering its first increase in new orders in six months, according to an S&P Global report.

The eurozone PMI, however, softened slightly, falling from 52.9 in September to 52.7 in October, its lowest level in two months. Both Spain and the eurozone remain above the 50-point threshold that separates growth from contraction, which is still a positive sign in a very difficult international context where the bloc's larger economies, especially France and Italy, are struggling.

Excluding Spain, which shows signs of moderation, the industry maintains a respectable cruising speed. Even though European production is growing overall, it does so despite the weakness of two of its main economies, France and Italy, whose manufacturers are further hampered by internal political uncertainty. Beyond Spain's commendable performance, the main positive contrast comes from Germany, the continent's true engine of industry, whose manufacturing PMI surged to 54.2 points in October, three-tenths higher than in September, confirming its steady recovery thanks to increased domestic demand—partly due to the German government's defense and infrastructure spending—and a recovery in export sales.

However, not everything is rosy, as Europe and Spain are not immune to the threat of an inflationary storm. The PMIs indicate this direction. In Spain's case, "high energy prices" pushed "input cost inflation to its highest in five months in October," according to the report, which warns that "supply-side disruptions translate into increasingly prolonged delivery times."

At the same time, the rise in production costs is reverberating with customers: "Sale prices rose in October, registering the fastest net increase in the last four months and consolidating their upward trend." All this is topped off by the growing fear among Spanish businesses about the long-term global instability, which has caused their confidence in the outlook for the next twelve months to fall since September.

This fear, in turn, restrains new hires, to the point that the Spanish manufacturing sector recorded a marginal decrease in employment compared to September. The industry is not alone in facing the increasing cost pressures. Across the eurozone, input inflation rose to its highest level in five months, amid a slowdown in new orders and a buildup of raw material stocks to levels unseen in nearly four years, as well as a clear deterioration in supplier delivery delays.

This means the European manufacturing sector is resilient, but the horizon is shrouded with looming clouds, characterized by high inflationary pressures that threaten consumer purchasing power and influence the direction of monetary policy in Europe, potentially strangling growth if it translates into higher financing costs. As S&P Global Market Intelligence chief economist Chris Williamson warned, "with input costs surging to one of the highest rates in the last four years due to energy price hikes and supply bottlenecks, the latest PMI data intensify pressure on the ECB to keep raising interest rates in the coming months, posing another obstacle for businesses."

The Bank of Spain's Governor José Luis Escrivá warned yesterday that the ECB has already begun to detect "indirect effects" of energy price hikes, which he described as "preoccupying," "albeit limited for now" and without clear indications of second-round effects on wages.