Euro Zone business growth eases in October as demand falters

LONDON - Reuters

The latest surveys have showed that while the euro zone’s economic recovery is taking root - readings above 50 denote growth - it remains delicate. AFP photo

The pace of growth in euro zone business eased unexpectedly this month as the buoyant demand for services seen in September faded, business surveys showed yesterday.

Markit’s Flash Composite Purchasing Managers’ Index (PMI) fell to 51.5 from September’s two-year high of 52.2, below all forecasts in a Reuters poll that predicted an uptick to 52.5.

The survey showed that while the region’s economic recovery is taking root - readings above 50 denote growth - it remains delicate.

“There are signs the recovery is broad-based. It’s pretty much in line with what the European Central Bank has been expecting to see - it’s a slow, uneven and fragile recovery,” said Chris Williamson, chief economist at Markit.

Williamson said the PMI, which surveys thousands of companies across the region and is seen as a good guide to economic growth, still pointed to a 0.1-0.2 percent expansion this quarter, similar to a Reuters poll taken earlier this month.

Having escaped from recession in the second quarter, supported by strong growth in Germany, the 17-nation bloc’s growth is only seen tepid at best through to at least 2015.

This month factories in Germany, Europe’s largest economy, again stepped up a gear, as expected, although the country’s service industry saw a surprising fall in the pace of growth.

And the situation was bleaker across the border in France, the bloc’s second-biggest economy, where manufacturing activity declined at a faster pace and services expansion all but ground to a halt. The pace of growth in the euro zone’s dominant service sector eased dramatically, with the PMI falling to 50.9 from 52.2. It had been expected to nudge up to 52.4 and was below all forecasts in a Reuters poll of 33 economists.

Copmanies keep reducing prices

An index measuring new business slumped to 50.2 from September’s 27-month high of 51.7, barely above the 50 mark that indicates growth. But Williamson said this could be a blip.

“In terms of expectations, they are fairly high, and firms have not been cutting staff at the rate they have been before,” he said.

Manufacturing activity growth accelerated slightly this month, albeit not quite as fast as expected, and firms were able to build up a backlog of work for only the second time in over two years. The PMI rose to 51.3 from 51.1, just missing the consensus for 51.4. A sub-index measuring output rose to 52.9 from 52.2.

With the bloc’s recovery so fragile, the ECB’s president, Mario Draghi, said earlier this month that the bank was ready to use any option to temper market interest rates, which could threaten economic growth by rising too far too fast.

The ECB said in July it would keep its interest rates at present or lower levels for an “extended period”, in its first use of forward guidance on policy.

Inflation fell to a 3-1/2 year low of 1.1 percent in September, well below the central bank’s target of below but close to 2 percent, giving it room to cut its main policy rate from the current record low if it wanted to. Firms reduced prices again this month, although the composite output price index nudged up marginally to 49.2 from 48.9.