Germany spurs growth in euro zone

October business activity expands at the fastest pace so far this year

BUSINESS activity in the euro zone expanded at the fastest pace this year so far in October, as Germany offset the impact from firms raising prices at the sharpest rate in more than five years, a survey showed.

The upturn in activity and prices will make welcome reading for policymakers at the European Central Bank (ECB), who left their ultra-loose policy unchanged last Thursday but kept the door open to more stimulus in December.

IHS Markit’s euro zone flash composite purchasing managers’ index jumped to 53.7 from September’s 52.6. It was far above the 50 point line indicating growth in activity and smashed even the highest forecast in a Reuters poll of economists that had predicted a more modest rise to 52.8.

However, although Germany outperformed expectations, France’s private sector activity expanded at a slower pace due to weaker than forecast service sector business.

Germany’s composite purchasing managers’ index (PMI) was also its highest this year, indicating Europe’s largest economy was performing well at the start of the fourth quarter after losing momentum in the previous two months.

IHS Markit said, if maintained, the PMI pointed to 0.4 percent euro zone growth in the current quarter, although there were upside risks to that prediction. A Reuters poll last week predicted a more modest growth rate of 0.3 percent.

Despite years of loose monetary policy, inflation is nowhere

near the ECB’s 2 percent target ceiling – it was 0.4 percent in September – so evidence of rising prices could dampen expectations the ECB extends its asset-buying programme. A Reuters poll predicted the ECB would tweak its asset purchase programme and announce an extension by year end.

Inflation It has spent more than €1 trillion (R15trln) buying government bonds, cut its refinancing rate to zero and adopted a negative deposit rate, besides giving essentially free loans to commercial banks.

“The ECB will still need to do more to bring inflation back towards its target on a sustained basis across the euro zone,” said Stephen Brown at Capital Economics.

A subindex measuring output prices rose to 50.5 from 50, its highest since August 2011, but still suggesting relatively weak inflationary pressures.

The bloc’s dominant service industry also performed much better than expected. Its PMI came in at a nine-month high of 53.5, ahead of September’s 52.2 and beating all forecasts in a Reuters poll where the median call was for 52.4.

New business growth picked up, suggesting the overall acceleration could continue into November. The index registered 53.2, up from 52.5.

Manufacturers followed the same trend. The factory PMI climbed to a 30-month high of 53.3, above the poll median and September’s 52.6, while the output index jumped to 54.4 from 53.8.

Highlighting the confidence about the coming months among manufacturers, they increased headcount at the fastest rate since May 2011. The employment subindex was 53.7 compared with September’s 52.1. – Reuters