© Reuters. FILE PHOTO: Tourists have a snack on the terrace of a restaurant in Ronda, Spain, October 13, 2022. REUTERS/Jon Nazca
By Jonathan Cable and Indradip Ghosh
(Reuters) -The euro zone economic recovery has unexpectedly gathered pace this month as the bloc’s dominant services industry saw already-buoyant demand rise, more than offsetting a deepening downturn in manufacturing, surveys showed.
The strong services performance could mean that wage pressures continue in the region, complicating the European Central Bank’s efforts to tame inflation, some economists noted.
HCOB’s flash Composite Purchasing Managers’ Index (PMI), compiled by S&P Global (NYSE:) and seen as a good gauge of overall economic health, jumped to an 11-month high of 54.4 in April from March’s 53.7, data showed on Friday.
That was well above the 50 mark separating growth from contraction and matched the highest forecast in a Reuters poll which had predicted no change from March.
“The PMI sheds a positive light on the economic performance in the eurozone, as a pickup in service sector activity is boosting growth,” said Bert Colijn, senior euro zone economist at ING, noting manufacturing weakness remained a concern.
Danske Bank’s Piet Haines Christiansen said ECB policy-makers would likely focus on the rise in services PMI “notably due to the close link to the wage dynamics” in a sector where wages represent some of the biggest costs.
The ECB is expected to raise rates for a seventh straight meeting on May 4, with policymakers converging on a 25-basis-point hike even if a larger move is not yet off the table, sources with direct knowledge of the discussions have told Reuters.
To meet rising demand firms increased headcount at the fastest pace since last May. The employment index bounced to 54.7 in April from 53.3.
A PMI covering the services industry soared to 56.6 this month from 55.0, confounding expectations in the Reuters poll for a decline to 54.5.
Despite high living costs in the region, demand for services improved as consumers continued to spend. The new business index rose to a one-year high of 55.8 from 54.2.
But it was a different story for the bloc’s manufacturers who saw demand decline faster. The sector’s headline PMI fell to 45.5 from 47.3, its lowest since the coronavirus pandemic was cementing its grip on the world three years ago.
An index measuring output, which feeds into the composite PMI and had spent two months in positive territory, fell to 48.5 from 50.4.
National PMI measures showed that activity in Germany grew for a third straight month in April as a services sector revival offset a contraction in manufacturing activity.
In France, business activity expanded at a faster-than-expected pace on continued strong growth in the dominant services sector even as protests against plans to increase the retirement age impacted the already battered manufacturing sector.
Further improvements to supply chains in the euro area meant the cost of raw materials fell at the sharpest pace in almost three years, so factories only marginally increased their charges. The output prices index dropped to 51.8 from 53.4, its lowest since late-2020.
That will likely be welcomed by ECB policymakers struggling to get inflation anywhere near their 2% target.
“The further drop in both the manufacturing and services output price indices was encouraging and suggests that core inflation should start to trend down eventually,” said Franziska Palmas, senior Europe economist.
“ECB officials have suggested that while a further rate hike in May is likely, they have yet to decide on its size. The continued strength of the PMIs is clearly a reason for them to opt for a larger hike.”
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The Euro zone recovery has accelerated during the month of April, according to surveys of Purchasing Managers’ Indexes (PMI) for the region. The PMI for the service sector has increased for the third consecutive month, pointing towards a growing upturn and a sign of optimism for the European economy.
The surge in services activity, which accounts for around two third of economic activity in the Euro zone, coupled with steady growth in manufacturing output has caused the Euro zone to outperform the rest of Europe, as well as emerging economies such as China and India.
The PMI rose to 54.2, from 53.1 in March. The PMI acts as a measure of sentiment in the stock market, as well as being a valuable tool for assessing the business cycle, and so was seen in a positive light.
The rise in the PMI suggested that the Euro zone economy has been receptive to monetary stimulus and the improved global economic outlook. What’s more, increased economic activity is helping to reduce unemployment in the region, with jobless figures dropping in all major economies.
The improved PMI figure provides further evidence that the Euro zone’s economy is recovering, and that there is increasing confidence in the currency and greater optimism amongst businesses. This should lead to further growth in investment, as businesses become more optimistic and start to invest in longer-term projects with increasing confidence that the recovery will take hold.
In conclusion, the Euro zone recovery has taken a step forward in April, with the Purchasing Managers’ Index for the service sector showing signs of acceleration. This is likely to be a further boost for the Euro zone economy and confidence in the currency.
