Lacklustre growth characterised by a slowdown plagues the EU while its central bank tries to jack up inflation rate that teeters on the verge of deflation, report Team IFM
Brussels, June 11: Euro-zone business growth slowed in May, but services output expanded at the strongest pace in almost three years, prompting the European Central Bank (ECB) to take a slew of measures to stabilise the economy for even growth.
While firms cut prices for the 26th straight month to stay afloat, greater services output helped create jobs in the region suffering from low inflation, poor growth and almost record high unemployment.
Output across the region remained solid, supported once again by Germany, and pointed to euro zone GDP growth of 0.4-0.5 percent this quarter, official data stated. French business activity, however, slipped back into contraction after just two months of growth.
Similarly, accelerating growth in the service industry was offset by an easing in manufacturing.
“Although the euro zone is enjoying its best performance for three years, this is an uneven, stuttering and lacklustre recovery,” Bloomberg quoted Chris Williamson, chief economist at survey compiler Markit as saying.
Markit’s Composite Purchasing Managers’ Index (PMI), a good gauge of growth, dipped to 53.5 in May, below April’s final 54.0, but it held above the 50-mark dividing growth from contraction for the 11th month running.
The slowdown in growth came despite firms again cutting their prices. The output price index nudged up to 48.8 from 48.7 but has held below the break-even mark since April 2012.
“The overall rate of growth is just not strong enough to allow firms to push through price hikes. This is perhaps the final nail in the coffin for hopes of a robust recovery without stimulus,” Williamson said.
FIGHTING DEFLATION
The ECB package includes “further reductions in the key interest rates, targeted longer-term refinancing operations, preparatory work related to outright purchases of asset-backed securities and a prolongation of fixed rate, full allotment tender procedures,” Bank chief Mario Draghi said at a press conference on Thursday.
Euro zone price inflation fell unexpectedly in May, coming in at just 0.5 percent, official data showed on Tuesday, increasing the risks of deflation in the currency area.
According to Draghi, the measures would contribute to a return of inflation rates to levels closer to 2 percent. Inflation expectations for the euro area over the medium to long term continued to be firmly anchored in line with ECB’s aim of maintaining inflation rates below, but close to, 2 percent, he said.
The index for the euro zone’s vast service industry rose to a near three-year high of 53.2 in May from 53.1 in April as new business came in at its fastest pace since mid-2011, with the related subindex rising to 52.8 from 52.3.
Markit’s Composite PMI showed that while output across the bloc remained solid in May, the pace of growth eased. Industrial producer prices, a proxy for consumer prices, fell as expected both on the month and on a year ago in April, Eurostat that provides detailed statistics on the European Union and its member-countries said on Wednesday.
The gross domestic product data showed euro-area growth slowed to 0.2 percent in the first quarter after the statistics office revised the last quarter of 2013 to show expansion of 0.3 percent. Consumer spending rose 0.1 percent, while net trade knocked 0.2 percentage point off GDP.
Markit’s services index for May was lower than an initial estimate and its combined measure of manufacturing and services declined to 53.5 from 54 in April. Markit said the surveys were consistent with economic growth of as much as 0.5 percent.
UK RECOVERING FAST
In Britain, which does not use the euro, the services industry expanded faster than expected in May, and hiring notched a 17-year high, triggering a Bank of England debate about how soon it should raise rates. The BoE is expected to be the first major central bank to begin hiking rates from a record low of 0.5 percent – although not until next year.
A services index came in at 58.6 in May, exceeding the 58.2 median estimate of economists. That compares with a reading of 58.7 in April.
“Record low interest rates are no longer necessary. The (UK) economy is growing rapidly and, if anything, is picking up pace,” Reuters quoted Christian Schulz at Berenberg as saying.
Just as the UK’s recovery seems to be progressing at a faster rate than that of the neighbouring euro zone economy, parallel divergences have emerged within the currency union.
For the euro area, Germany “remains the key driver” and France is a “major drag,” Williamson said. A gauge of manufacturing and services activity in Europe’s largest economy eased to 55.6 in May, while French output contracted.
Companies hiring workers in Germany and Spain offset job cuts in Italy and France, leading to a second monthly increase in employment in the euro area. Despite that, the jobless rate has hardly budged from a record 12 percent last year.
According to Draghi, real GDP in the euro zone rose by 0.2 percent, quarter on quarter, in the first quarter confirming the ongoing gradual recovery. But the outcome was somewhat weaker than expected. Recent surveys indicate moderate growth in the second quarter as well.
Looking ahead, domestic demand should continue to be supported by a number of factors, including the favourable policy stance, ongoing improvements in financing conditions working their way through to the real economy, the progress made in fiscal consolidation and structural reforms, and gains in real disposable income resulting from drops in energy prices.
At the same time, although labour markets have shown further signs of improvement, unemployment remains high in the euro area and, overall, unutilised capacity continues to be sizeable.
“…the key ECB interest rates will remain at present levels for an extended period of time in view of the current outlook for inflation. This expectation is further underpinned by our decisions today (Thursday). Moreover, if required, we will act swiftly with further monetary policy easing,” Draghi said at the press conference.