Euro zone expansion loses momentum

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Jonathan Cable London

Price cuts by euro zone firms failed to prevent business growth from losing momentum last month, all but sealing the case for looser monetary policy at today’s meeting of European Central Bank (ECB) policymakers.

Markit’s composite purchasing managers’ index (PMI) showed that while output across the bloc remained solid in May the pace of growth eased – despite factory gate prices falling for the 26th consecutive month.

“Today’s PMIs remain consistent with some recovery in the euro zone,” Annalisa Piazza at Newedge Strategy said. “That said, we rule out that the picture of moderate recovery will be an obstacle for the ECB to justify further accommodation this week.”

ECB policymakers have flagged a move at today’s governing council meeting. Sources said last month that the bank was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small and medium-sized businesses.

Annual euro zone inflation, which the ECB prefers to be just under 2 percent, fell unexpectedly last month to just 0.5 percent, increasing the risks of deflation and making a policy response today almost certain.

Industrial producer prices, a proxy for consumer prices, fell month on month and year on year in April as expected, Eurostat said yesterday.

In Britain, which does not use the euro, the services industry expanded faster than expected last month, and hiring notched a 17-year high, adding to a debate at the Bank of England (BoE) about how soon it should raise rates.

The BoE is widely expected to be the first major central bank to begin hiking interest rates from a record low of 0.5 percent – although not until next year.

“Record low interest rates are no longer necessary. The [UK] economy is growing rapidly and, if anything, is picking up pace,” Christian Schulz at Berenberg said.

Just as Britain’s recovery seems to be progressing faster than that of the euro zone, parallel divergences have emerged within the currency union.

The bloc’s growth was again supported by Germany and pointed to euro zone gross domestic product (GDP) expanding 0.4 percent to 0.5 percent this quarter. But French business activity slipped back into contraction after just two months of growth.

And accelerating growth in the service industry was offset by an easing in manufacturing.

The composite PMI, widely seen as a good gauge of growth, dipped to 53.5 last month, shy of a flash reading of 53.9 and below April’s final 54. But it held above the 50 mark dividing growth from contraction for the 11th month running.

First quarter GDP growth was confirmed at just 0.2 percent earlier yesterday, leaving currency and bond markets little moved as they await the ECB’s decision today. – Reuters


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