Business growth in eurozone rises to highest rate this year ECB likely to ease monetary policy
Eurozone business activity expanded the most in nearly a year in November on strong manufacturing and buoyant services growth in Germany, stirring some optimism that economic momentum is picking up again.
A strong run of data is offers some hope a mid-year lull after a flurry of activity at the start of the year may be over, It is unlikely, however, to dent expectations the European Central Bank will announce an extension to its stimulus program next month. The IHS Markit Euro Zone Flash Composite Purchasing Managers’ Index jumped to 54.1, its highest so far this year, from 53.3 in October, just shy of 54.3 last December.
It is now well above the 50 that divides growth from contraction, suggesting 0.4 percent growth in the fourth quarter according to IHS Markit, slightly higher than the median forecast in a Reuters poll of 0.3 percent. Services firms in Germany and France, the bloc’s top two economies, fared better than manufacturers. In the broader eurozone survey, however, manufacturers had a stronger run.
Taken together, the data suggest the pickup in activity is not confined to Germany and France. “It looks like smaller economies are picking up pace after a very long time and downward price pressures are somewhat abating with companies managing to push through price increases,” said Peter Vanden Houte, chief eurozone economist at ING Financial Markets.
“But I’m not sure the ECB will shift gear very rapidly for the simple reason that it has made mistakes in the past by tightening policy too soon. We still expect the ECB to lengthen its quantitative easing program in December.” The ECB next meets on Dec. 8 and economists polled by Reuters last week expect it to announce an extension to its 80 billion euros a month bond purchase program that is currently scheduled to end in March 2017.
Despite years of ultra-loose monetary policy, including printing money, cutting interest rates below zero and giving banks virtually free cash, inflation has only risen in baby steps in the eurozone.
At 0.5 percent in October, it is still far below the ECB’s 2 percent target ceiling. But if the trend of tightening price pressures, as indicated by the PMIs, continues it could dampen expectations of further policy easing from the ECB. Output prices for services firms in the eurozone remained unchanged in November, only the second time in the past 14 months when companies did not resort to discounting to drum up new business. “This most likely reflects the year-over-year increase in energy prices that fell significantly one year ago,” said Holger Sandte at Nordea. “(But) the underlying cost and price pressure is still very low and a reason for the ECB the maintain the current degree on monetary accommodation for a long time.”
The bloc’s dominant services industry also performed much better than expected, smashing even the highest forecast in a Reuters poll. Similar to the composite number, its PMI came in at a 11-month high of 54.1, up sharply from October’s 52.8.
The factory PMI climbed to 53.7, its highest since January 2014, above the poll median and October’s 53.5. The PMI surveys were conducted after the US election but IHS Markit said panelists had yet to factor into responses Donald Trump’s shock victory, whose campaign hinged on trade protectionism and migration curbs. So far there has been very little discernible reaction in both in the eurozone and UK economies from Britain’s shock vote to leave the European Union in June. Most economists agree, however, that the impact will be felt more clearly next year. The business expectations index in the euro zone services PMI dipped slightly this month compared with the six-month high it hit in October.
There are also three key national elections in the eurozone next year, which may interfere with the eventual negotiations between Britain and the EU on a divorce, provided UK Prime Minister Theresa May follows through on her intention to trigger the proceedings by March next year. —Reuters
This file photo taken on November 17, 2014 shows a copy of La Marseillaise newspaper at a printing house. La Marseillaise, a left-wing newspaper founded during the Resistance, announced yesterday it was filing for bankruptcy and hoped for receivership. —AFP