Euro area private sector activity increased in June, exceeding previous expectations and signaling a stronger recovery. Activity in Spain showed the strongest growth, while in France conditions remained contractionary due to electoral uncertainty.
advertisementEuro area private sector activity expanded in June, beating previous expectations and signaling that the recovery is on track, albeit with wide variations across member states.
The seasonally adjusted HCOB euro zone composite PMI production index, which captures both the services and manufacturing sectors, came in at 50.9, remaining unchanged above 50.0 for the fourth consecutive month, a slight slowdown in the pace of expansion compared to May's 52.2, but slightly better than the initial estimate of 50.8.
The upward revision was due to a revision in the expansion rate of the services sector, which came in at 52.8 in June, above the previous estimate of 52.6 but down from 52.3 in May. Nevertheless, it marked the fifth consecutive month of expansion in the services sector.
“Euro area growth is entirely driven by the services sector,” commented HCOB's chief economist, Dr Silas de la Rubia.
The euro zone's services sector is benefiting from rising tourism, according to de la Rubia: The index of new exports, which includes tourism, has risen steadily for six months and is now almost two percentage points above its long-term average.
The reasons for the European Central Bank's (ECB) interest rate cut in June are partly supported by the performance of the HCOB Services PMI Price Index: input prices, and prices charged to customers, increased at the slowest rate in three years.
Nearly all euro area countries for which composite PMI data is available recorded growth in June, except for France.
Spain leads growth, buoyed by tourism and interest rate outlook
Spain remains the euro zone's fastest-growing economy, with a strong tourist season and an improving interest rate outlook likely helping to boost output.
HCOB Spain's June services PMI was 56.8, revised up from the previous estimate of 56.4 and just below May's 13-month high of 56.9. This marks the 10th consecutive month of expansion in Spain's services sector, supported by solid demand from both domestic and international customers.
Spain's employment growth picked up pace for the 21st consecutive month as companies added staff to meet current and expected demand, but the hiring increase also boosted wage levels in June.
“Some panelists believe that a year from now, economic activity will still increase due to lower inflation and interest rates,” said Jonas Feldhusen, a junior economist at HCOB.
Feldhusen expects second-quarter growth to exceed the historical average following large revisions to GDP figures for the past two quarters.
French private sector activity shrinks amid election turmoil
France was the exception, where private sector business activity weakened for the second consecutive month.
France's HCOB composite PMI index improved slightly from the previous month but was still below 50, indicating a contraction.
“The looming election is making service providers less optimistic about future activity. Business confidence is not only at a five-month low, it is also clearly below its historical average. This has weakened job growth,” said HCOB economist Norman Liebke.
The upcoming elections appear to be a big factor, Liebke said, especially as new orders have fallen sharply. French service companies are working to clear backlogs in response to weak demand, which has led to a divergence between output and new orders.
Moreover, while service price inflation in France is gradually easing, it remains a cause for concern due to the recent historic rise in input prices, with companies reporting rising wage costs and higher raw material prices.
