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Business activity in the euro zone is expanding at its fastest pace in nearly a year, a closely watched business survey shows, showing the region's economy is emerging from a recent slump.
S&P Global's monthly index of euro zone business activity in April beat most economists' expectations, as growth in the services sector offset weakness in manufacturing. Price pressures also increased as service companies passed on higher wage costs.
The Eurozone's Composite Purchasing Managers' Business Index (preliminary), which is tracked by policymakers as an early indicator of the economic outlook, rose in April from 50.3 in the previous month to 51.4, the highest level in 11 months. rose to Economists polled by Reuters had expected a lower reading of 50.8.
The findings lead European Central Bank officials to believe that while inflation is steadily declining towards the 2% target, the economy has avoided recession and the eurozone remains on a “soft landing” trajectory. It seems to make people feel safe while riding.
S&P said companies reported slightly higher sales price increases from last month as higher labor costs and higher energy and fuel prices “suggest stubborn inflationary pressures.”
But Andrew Kenningham, an economist at consultancy Capital Economics, said price pressures “remain close to long-term averages and are not yet at a level of concern for policymakers.”
Investors expect the ECB to begin cutting benchmark deposit rates from a record 4% at its June 6 Governing Council meeting. ECB deputy president Luis Deguindos said in an interview with Le Monde published on Tuesday that this was now “the limit”. As long as price pressures are contained, it is a fait accompli.
Eurozone PMI data has risen for the sixth straight year, signaling a recovery after the economy was halted for much of 2023. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said the data suggested the eurozone had returned to quarter-on-quarter levels. The gross domestic product (GDP) growth rate for the quarter was about 0.3% since the beginning of the year.
However, the gap between the thriving service sector and the struggling manufacturing sector is widening. New orders to service companies rose at the fastest pace since May 2023, but manufacturers suggested that two consecutive years of declining demand only worsened in April.
Christoph Weil, an economist at German financial giant Commerzbank, said the “poor” situation in manufacturing meant growth across the eurozone was likely to remain weak this year.
“This is still not in line with the optimism of most economists and the ECB, which expects a fairly strong economic recovery this year,” he said.
Despite manufacturers' woes, Germany's PMI reading rose above 50, the dividing line between growth and decline, for the first time in 10 months. France's numbers also improved, but remained in areas of decline in some areas.
The rest of the eurozone “performed the best…despite a slight slowdown in growth,” S&P said.
Britain performed even better, with the preliminary PMI index for April rising to 54 from 52.8 in March, well above the 52.6 expected by economists polled by Reuters.
