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Euro zone business growth stays tepid as summer ends

LONDON: Euro zone business growth was a touch faster than expected last month but remained lacklustre as the bloc's domi

Sep 04 2019

LONDON: Euro zone business growth was a touch faster than expected last month but remained lacklustre as the bloc's dominant service industry only partially offset a slowdown in manufacturing, a survey showed on Wednesday.

Worryingly for policymakers at the European Central Bank, who are widely expected to loosen monetary policy next week, forward-looking indicators in the survey imply there won't be a turnaround anytime soon.

IHS Markit's Euro Zone Composite Final Purchasing Managers' Index (PMI), considered a good gauge of overall economic health, nudged up 51.9 in August from July's 51.5.

That pipped a preliminary reading of 51.8 but held dangerously close to the 50 mark separating growth from contraction.

Retail sales in the bloc fell in line with expectations in July, providing a negative sign from consumers at the start of the third quarter, official data showed on Wednesday.

"The small upward revision to August's euro zone PMI leaves it still pointing to slow GDP growth at the start of H2. And the fall in retail sales in July suggests that consumption started Q3 on a weak footing," said Melanie Debono at Capital Economics.

IHS Markit said the composite PMI, barring any substantial change in September, pointed to economic growth of just 0.2% this quarter, matching the forecast in a Reuters poll. The survey compiler noted official data suggested growth could be even weaker.

A sister survey released on Monday showed manufacturing activity contracted for a seventh month in August but Wednesday's release showed services growth accelerated. The PMI rose to 53.5 from July's 53.2, above the flash 53.4 reading.

"While small, it at least indicates that second round effects from the industrial slump are not yet impacting services that much," noted Bert Colijn at ING.

But the mismatch between manufacturing and services in member countries has raised questions about how long it will be before the bloc's vast services industry is dragged down by industrial malaise.

Forward-looking elements of the euro zone services survey suggest not long. Hiring was curtailed, backlogs of work were run down and optimism was its weakest in nearly five years.

The services employment sub-index dipped to 53.2 from 53.5, the lowest since the start of the year, and an overall future output sub-index dropped to a more than six-year low of 55.4 from 58.8.

A survey on Monday from major exporter Germany showed the manufacturing sector in Europe's largest economy remained in contraction in August although Wednesday's figures showed its service industry remained robust.

France's services activity bounced to a nine-month high, indicating the bloc's second-largest economy would grow 0.3% this quarter, IHS Markit said.

Copyright Reuters, 2019