Eurozone business growth hits three-year high but ECB cautious

LONDON: Eurozone business growth accelerated at its fastest pace in over three years in May, a survey showed on Friday, but European Central Bank President Christine Lagarde said an uncertain recovery still needed emergency support from the ECB.

After a slow start to vaccinations the pace is picking up, allowing some restrictions imposed to quell the spread of the coronavirus to be lifted, and a strong resurgence in the bloc’s now-reopening service industry added to the impetus from a booming manufacturing sector.

As the economy rebounds and confidence improves, some policymakers are making the case for the ECB to start giving up its emergency measures and revert to more traditional forms of stimulus.

But others are more cautious, warning the fledgling recovery is predicated on copious ECB support and that a recent rise in borrowing costs to two-year highs is already a major drag.

“We are committed to preserving favourable financing conditions. It’s far too early and it’s actually unnecessary to debate longer-term issues,” Lagarde said on Friday.

“I have repeatedly said that policymakers needed to provide the right bridge across the pandemic, well into the recovery, so we can actually deliver on our mandate.”

Alongside that, eurozone finance ministers will continue to support their economies but were upbeat on Friday about prospects for the post-pandemic recovery.

With more businesses reopening - or at least adapting to lockdowns - IHS Markit’s flash Composite Purchasing Managers’ Index, seen as a good guide to economic health, climbed to 56.9 in May from April’s final reading of 53.8.

That was its highest level since February 2018 and comfortably above the 50 mark separating growth from contraction, as well as the more modest increase to 55.1 predicted in a Reuters poll.

The bloc’s economy will expand 1.4% this quarter, according to a Reuters poll last week that also found forecasts for the rest of the year had been downgraded from last month.

In Germany, Europe’s largest economy, services activity rose by the most in nearly a year, helped by a loosening of restrictions. But supply bottlenecks in manufacturing led to production problems at a growing number of factories.

The lifting of a lockdown in France unleashed a business boom there, with activity surging past expectations to set the stage for an economic rebound.