Euro zone factory output near 4 1/2-year high in July but demand still weak, PMI shows

LONDON, Aug 3 (Reuters) - Euro zone factory output surged at its fastest pace in nearly four-and-a-half years in July but growth was largely driven by firms clearing order backlogs rather than rising demand, pointing to a fragile recovery, a survey showed.

Conflict in the Middle East has disrupted supply chains and sent energy costs soaring, causing difficulties for manufacturers. Inflation in the common currency bloc rose to 2.9% in July from 2.8% a month earlier. 

The headline S&P Global Eurozone Manufacturing PMI Index (PMI) rose to 51.9 in July from June's 51.4, its highest reading since April but just below a preliminary estimate of 52.0.

An index measuring output, which feeds into a composite PMI due on Wednesday, bounced to 52.9 from 51.7, its highest level since March 2022.

A reading above 50.0 indicates expansion.

"Euro zone factories are enjoying something of a summer growth spurt ... However, there are signs that this good news may prove short-lived, with momentum at risk of fading as autumn approaches," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Orders rose only marginally in July, well below the pace of output growth, suggesting factories are running hot on old work rather than new business. Export orders fell again, with declines in France, Spain, Italy and Austria more than offsetting gains elsewhere.

"New work inflows therefore remain worryingly weak, meaning producers are having to rely on orders placed in prior months to drive the latest increase in production," Williamson added.

Firms completed backlogs of unfinished work at the steepest rate since January.

Factory employment fell again in July, extending a run of job cuts, as companies grew more cautious about the prospect of a slowdown in work.

On prices, input cost inflation eased to a five-month low in July, and factory gate prices rose at their softest pace since March. Supply chain pressures, linked to the ongoing Middle East war, remained elevated but were the least acute in five months.

Inflation risks are high and the European Central Bank may need to raise interest rates again in response to the Iran war, three ECB policymakers said last month but stopped short of calling for a hike at the bank's September meeting.

Business confidence edged up to its highest since February, though it remained below its long-run average, reflecting a still-cautious mood among euro zone goods producers. The euro zone economy grew faster than expected last quarter, expanding 0.4%, official data showed.

(Reporting by Jonathan Cable; Editing by Toby Chopra)