Euro zone business activity picked up in June but doubts linger: PMI

Monday, 9 July 2018 00:00 - - {{hitsCtrl.values.hits}}

Unfinished pliers still glow after being hot-formed by a hammer at the factory of Knipex, a 130 year-old family-owned pliers and tools maker company in Wuppertal, western Germany-REUTERS

LONDON (Reuters): Euro zone business growth accelerated in June, offering encouragement to the European Central Bank to tighten policy, but optimism among purchasing managers was at its lowest ebb since late 2016, a survey found.

Faster growth across the currency union, alongside rising price pressures, will reassure ECB policymakers who last month said the bank would shut its hallmark bond purchase scheme by the end of the year.

But in a balanced announcement reflecting uncertainties hanging over the economy, the ECB signaled on June 14 that any interest rate hike was still distant.

Britain provided a similar story of stronger growth. Its large services industry grew last month at its fastest rate since October, suggesting the economy might be strong enough for the Bank of England to raise rates in August, as expected.

IHS Markit’s Final Composite Purchasing Managers’ Index for the euro zone, seen as a good overall indicator of growth, rose to 54.9 in June from May’s 54.1, comfortably above the 50 mark separating growth from contraction.

That beat an earlier flash reading of 54.8, but the latest PMI is lagging much higher numbers from around the turn of the year. The future output index, which tracks business optimism, fell to 63.4 from 63.7 — its lowest since November 2016.

German services growth accelerated to a four-month high in June and French private sector activity picked up, helped by a rebound in the services sector that more than offset a further slowdown in manufacturing.

“Stabilisation”

IHS Markit said the PMIs signaled second quarter economic growth of just over 0.5%, matching the median forecast in a Reuters poll last month.

“This is a sign that at least some of the weakness in Q1 was temporary and at least suggests we are not embarking on the start of a sharp slowdown,” said Jennifer McKeown at Capital Economics said of the euro zone numbers.

“There has been some stabilisation in the surveys if nothing else. That will reassure the ECB that a gradual normalisation of policy is warranted.”

The June manufacturing PMI, released on Monday, showed euro zone factory growth slowed to an 18-month low, slipping for the sixth month in a row amid widespread concerns about trade barriers and their impact on economic activity.

Services firms were less affected by fears of a trade war. Activity in the bloc’s dominant industry accelerated, with the PMI jumping to a four-month high of 55.2 from 53.8.

That increase came despite firms raising their charges much more sharply. The services output prices PMI bounced to a five-month high of 53.2 from 52.0.

“Firms’ costs and average selling prices for goods and services are meanwhile rising at rates close to seven-year highs, which will likely feed through to higher consumer price inflation in coming months,” said Chris Williamson, chief business economist at IHS Markit.

Euro zone inflation rose to 2.0% in June, its highest rate for more than a year and above the ECB’s target, preliminary data from Eurostat showed last week.