Euro zone businesses log strongest month in over two years in January

Wednesday 05 February 2014 17.18
Markit's euro zone Composite Purchasing Managers' Index climbed to 52.9 in January from 52.1 in December
Markit's euro zone Composite Purchasing Managers' Index climbed to 52.9 in January from 52.1 in December

The euro zone's private sector logged its busiest month in two and a half years in January as buoyant manufacturing growth outshone a more modest expansion in services activity, surveys have shown.

Markit's euro zone Composite Purchasing Managers' Index (PMI) climbed to 52.9 in January from 52.1 the previous month.

The index, which gauges business activity across thousands of companies, is seen as a good guide to economic health

It was the highest final reading since June 2011 and was comfortably above the 50 mark that separates growth from contraction, although it was shy of the flash reading of 53.2 reported in late January.

Markit said the PMI showed the now 18-member bloc's recovery was broad-based, with Germany leading an upswing in periphery members amid signs of a stabilisation in France, the euro area's second-biggest economy.

"The euro zone PMI was down slightly on the earlier flash reading but nevertheless signals a very encouraging start to the year," said Chris Williamson, Markit's chief economist.

"The main concern is that the recovery is still all too dependent on the manufacturing sector. Although the service sector has returned to growth, its weak pace of expansion reflects still-subdued domestic demand."

A PMI covering services businesses, which make up the bulk of the bloc's economy, rose to a four-month high of 51.6 from 51, below a flash reading of 51.9. Data earlier this week showed factories had their best month since mid-2011. 

Services firms found new orders trickling in slower than in December. The related sub-index dropped to 50.8 from 51.4, weaker than the flash reading of 51, and suggesting little improvement in the headline number this month.

Williamson remained upbeat about the surveys though, saying forecasts for 2014 economic growth would be revised up from the current consensus of 1% if the PMIs continued to rise in the coming months. 

The upturn is starting to feed through to the labour market, with businesses holding staffing levels steady for the second month, having cut them for almost all of the last two years.

A composite index measuring employment held steady at 50 and comes after official data last week showed unemployment across the bloc was stuck near a record high of 12% for the third month in a row in December.

Worryingly for the European Central Bank, which is expected to leave policy unchanged when it meets on Thursday, firms cut prices for the 22nd month in a row, showing very little in the way of pricing power. 

Inflation fell well below the ECB's target of just below 2% in January - official data showed last week prices rose only 0.7% - and the latest PMI data will do little to allay fears of deflation in the region.

More expensive energy made euro zone producer prices grow faster than expected month on month in December, data showed yesterday, but year-on-year prices still fell, again pointing to risks of deflation that the ECB will have to address.