Euro zone businesses see expansion in July - survey

Tuesday 05 August 2014 10.43
Strong growth in services industries offset weak manufacturing
Strong growth in services industries offset weak manufacturing

Euro zone business expanded at the second-fastest pace in three years last month as the service industry offset a lacklustre performance in manufacturing, surveys have shown.

But resilient growth in the bloc's major economies bar France could not mask the deflationary pressure weighing on the region just two days ahead of a European Central Bank monetary policy meeting.

Markit's Purchasing Managers' Index for the euro zone's service industry leapt to 54.2 from June's 52.8, although that was down from a flash reading of 54.4.

That helped drive up the Composite PMI, which is based on surveys of thousands of companies across the region and is seen as a good indicator of growth, to 53.8 from June's 52.8.

July's final composite reading was below a preliminary estimate of 54.0 but above the 50 mark that separates growth from contraction for the 13th month.

Markit said the data suggested the bloc's economy was growing at a quarterly rate of 0.4%.

"The surveys point to a gathering pace of growth in the region's major domestic economies, as signalled by the services-led upturns in countries such as Germany and Spain," said Chris Williamson, chief economist at Markit.

"The worry is that this is still only generating very modest job creation. There's also a great deal of uncertainty as to which direction the pace of growth will take in coming months."

Headcount barely increased last month, and the composite employment index nudged up to 51.0 from 50.7, its highest since September 2011. But to keep busy firms were forced to run down old orders for a second month as new business growth decelerated.

Some of that business was generated by firms cutting prices again - and at a sharper rate than in June. The service output price index, which has been below 50 since late 2011, fell to 48.5 from 49.2.

Inflation in the 18-member bloc fell in July to just 0.4%, the lowest since the height of the financial crisis nearly five years ago.

To counter the threat of deflation, the ECB in June unveiled a raft of measures including cutting the deposit rate below zero and offering more long-term loans aimed at boosting bank lending to businesses. It is not expected to tinker with policy on Thursday. 

Britain's services industry sees brisk growth

Meanwhile activity in Britain's services industry increased last month at the fastest rate since November, helping overall private-sector activity to its briskest growth in three months, a survey has shown.

The figures are likely to revive speculation over whether the Bank of England will raise interest rates before the end of the year, and contrast with other data pointing to a slight slowdown in British growth in the second half of the year.

The Markit/CIPS services purchasing managers' index rose to an eight-month high of 59.1 in July from June's reading of 57.7, beating the average forecast of 57.9 in a Reuters poll of economists.

The related PMI for the manufacturing sector reported last week sank to a one-year low, but combined with robust construction data yesterday, the stronger services growth was enough to lift July's composite PMI to a three-month high.

"The domestic economy clearly continued to boom in July," said Chris Williamson, chief economist at Markit, which compiles the survey.

Britain's economy grew by 0.8% between March and June- well above its long-term quarterly trend of 0.5-0.6% - and Williamson said similar growth was possible for the July-September period.

Services growth was supported by new orders and investment, Markit said. The PMI survey covers private-sector services firms excluding retailers, and encompasses sectors which make up almost half of the economy.

However, service sector firms' confidence about the future was down slightly to 71.2 from 72.3, its lowest level in eight months though still high by historic standards.

Employment growth slowed slightly from June's record high but remained robust, while prices barely rose - something which may lessen pressure on the BoE to start raising rates from their record low of 0.5%.

"The sustained strength of growth will add to calls for interest rates to start rising later this year. However ... an absence of inflationary pressures means there is still a strong case for any tightening of policy to be delayed until 2015,"Williamson said.

BoE Governor Mark Carney will present a quarterly update to the central bank's economic forecasts on 13 August and is also likely to give some guidance on how much room the economy has left to grow before inflation pressures prompt a rate rise.