Euro zone business recovery stays strong as firms slash prices

Written by Reuters | London | Updated: Mar 24 2014, 20:18pm hrs
The pace of growth among euro zone private businesses has barely slowed from February's 2-1/2 year high this month, but firms were forced to slash prices again to maintain the momentum, surveys showed on Monday.

With a solid expansion in both the manufacturing and services industries, and a return to growth in the bloc's second-biggest economy of France, the recovery appears to be ever more broad-based.

"The recovery is gaining traction. One of the particularly encouraging signs policymakers will take from this is that it has broadened out to encompass France," said Chris Williamson, chief economist at survey compiler Markit.

Markit's Composite Purchasing Managers' Index, which is based on surveys of thousands of companies across the continent and is seen as a good growth indicator, edged down to 53.2 from February's 32-month high of 53.3.

That just missed expectations in a Reuters poll for it to hold at last month's reading. But it marked the ninth month that the index has held above the 50-point line that divides growth from contraction.

Williamson said the latest data should indicate 0.5 percent economic growth this quarter, stronger than the 0.3 percent predicted in a Reuters poll earlier this month.

But worryingly for policymakers, firms have discounted prices to drum up business for two years now - and they did so in March at a steeper rate than last month. The composite output price index sank to an eight-month low of 48.5 from 49.3.

Inflation across the currency union was just 0.7 percent in February, well below the European Central Bank's 2 percent target ceiling, and the latest PMI will do little to allay fears of deflation in the region.

"These are more signs of deflation setting in. It wasn't just in the periphery - in Germany we are seeing some downward pressure on output prices. Whether or not that justifies more stimulus is the big question," Williamson said.

A significant number of economists have doubts about the ECB's view that deflation is not a threat and that the recovery will take hold without any more action.

With little room to manoeuvre, having already slashed its main interest rate to near zero and given more than 1 trillion euros of cheap cash to banks for a three-year period, the ECB held policy steady when it met earlier this month.

OUTLOOK BRIGHTER

A PMI survey of the bloc's dominant service sector fell to 52.4 from February's 52.6, missing expectations for no change. The manufacturing PMI fell to 53.0 from 53.2, in line with the median in a Reuters poll.

The manufacturing output index, which feeds into the composite PMI, did rise though, climbing to 55.4 from 55.3.

Earlier French data showed the private sector grew there for the first time in five months, while German composite figures showed growth slowed from February's 33-month high but remained strong.

With the euro zone outlook appearing healthier - new business picked up at the fastest pace in nearly three years - optimism among services firms about the year ahead soared to its highest level since the middle of 2011. The business expectations index jumped to 65.1 from 62.4.

Factories again built up a backlog of work so they increased headcount for the third month, albeit at a slower pace than in February. The employment index slipped to 50.3 from 50.6.

"Most encouraging of all was a rise in the backlogs of work so it means activity should be fairly strong next month and we should see employment pick up," Williamson said.