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The outlook for the European economy has brightened after activity continued to rise at services companies across the UK and eurozone and the downturn in manufacturing eased, according to a closely watched survey of businesses.
S&P Global’s flash eurozone composite purchasing managers’ index, which measures businesses’ activity across the bloc, rose to a nine-month high of 49.9, up from 49.2 a month earlier. Economists polled by Reuters had forecast a smaller rise to 49.7.
It is the 10th consecutive month that the eurozone PMI reading has been below the key 50 mark that separates contraction from expansion. However, it has risen for five months, indicating the outlook for the bloc is improving after the economy stagnated for most of 2023.
In the UK, the PMI composite reading pointed to a mild rebound in the economy in the first quarter with a reading of 52.9 in March, down fractionally from 53 in February and marginally lower than the 53.1 forecast by economists polled by Reuters.
S&P said growth in the UK services sector was “quicker than that seen in the manufacturing sector, despite losing momentum in March”.
Within the eurozone figures, business activity continued to contract in Germany and France, while it grew in the rest of the bloc. The downturn in the manufacturing sector continued, easing only slightly, while services activity picked up.
Even though business confidence for the year ahead rose to a 13-month high in the eurozone, analysts said the survey signalled the economy would still be plagued by weak output growth and high price pressures in the first quarter of this year.
Capital Economics economist Franziska Palmas said the findings “suggest that the eurozone economy is still flatlining” and that “underlying price pressures are easing again but remain high”.
Services companies increased their selling prices at a “strong pace by historical standards” even though the rate was the slowest for four months, S&P said. Manufacturers’ selling prices fell for the 11th month in a row.
European Central Bank president Christine Lagarde said this week it was waiting for more data to show whether inflationary pressure from rising wages had continued to ease in the first quarter before deciding whether to cut interest rates — most likely in June at the earliest.
“Price pressures remain elevated,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which sponsors the eurozone PMI survey. “Therefore, the PMI price news is not enough to change the ECB’s apparent plan to cut rates in June rather than April.”
Companies continued to add jobs for a third consecutive month, albeit at “only a very modest pace”, S&P said. Job losses in manufacturing matched the highest level since August 2020, although this was more than offset by hiring in the services sector.
“New orders fell at the slowest rate for 10 months and backlogs of work were depleted at the weakest rate for nine months,” S&P said. The downturn in eurozone manufacturing showed signs of easing after the PMI output index for the sector rose slightly to an 11-month high.
In the UK, new orders increased for the fourth month in a row. Chris Williamson, chief business economist at S&P Global Market Intelligence, said the “further robust expansion of business activity” pointed to UK gross domestic product rising 0.25 per cent in the first quarter.
However, the survey also raised renewed concerns over sticky domestic inflation as British companies’ selling price growth rose to its highest since July 2023, driven by the services sector. Businesses participating in the survey said output prices rose to absorb the cost of higher wages.
The Bank of England is expected to keep interest rates on hold after its meeting on Thursday. Investors will be watching for signals of when the BoE may start cutting rates after data this week showed UK inflation fell more than forecast to 3.4 per cent in February, its lowest level since 2021.
Source: Economy - ft.com
