Business

Euro-zone business activity rises to 11-month high

Data expected to reassure ECB officials that euro zone still on track for ‘soft landing’

A worker assembles a photovoltaic thermal collector on production line at Sunmaxx in Ottendorf-Okrilla Dresden, Germany. Business activity in the eurozone has expanded at the fastest pace for almost a year, indicating the region’s economy is emerging from its recent stagnation, according to a closely watched survey of companies. Photograph: Sean Gallup/Getty Images

Martin Arnold
Tue Apr 23 2024 - 17:24

Business activity in the euro zone has expanded at the fastest pace for almost a year, indicating the region’s economy is emerging from its recent stagnation, according to a closely watched survey of companies.

Growth in the services sector offset weakness in manufacturing to lift S&P Global’s monthly gauge of euro-zone corporate activity for April above the forecasts of most economists. Price pressures also picked up as services companies passed on higher wage costs.

The flash composite purchasing managers’ index for the euro zone, tracked by policymakers as an early gauge of economic fortunes, rose to an 11-month high of 51.4 in April, up from 50.3 a month earlier. Economists polled by Reuters had forecast a lower reading of 50.8.

The poll is likely to reassure officials at the European Central Bank (ECB) that the euro zone is still on track for a “soft landing” as the economy avoids a recession while inflation falls steadily towards its 2 per cent target.

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S&P said companies had reported slightly higher increases in their selling prices than the previous month, driven by rising labour costs as well as increased energy and fuel prices, which “hint at stubborn inflation pressures”.

But Andrew Kenningham, an economist at consultants Capital Economics, said price pressures “remain close to their long-term averages so are not yet at worrying levels for policymakers”.

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Investors expect the ECB to start cutting its benchmark deposit rate from an all-time high of 4 per cent at its meeting on June 6th. ECB vice-president Luis de Guindos told Le Monde in an interview published on Tuesday that this was now a “fait accompli” as long as price pressures remained in check.

The euro-zone PMI reading has risen for six months, signalling a rebound after the economy ground to a halt for most of 2023. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said the data suggested the euro zone had returned to quarter-on-quarter gross domestic product growth of about 0.3 per cent since the start of the year.

But the gap between the stronger services sector and the struggling manufacturing industry is widening. New orders for services companies rose at the fastest pace since May 2023, but manufacturers indicated that their continuous two-year decline in demand only worsened in April.

Christoph Weil, an economist at German lender Commerzbank, said the “poor” situation in manufacturing meant that overall euro-zone growth was likely to remain weak this year.

“We do not yet share the optimism of the majority of economists and the ECB, who are expecting a fairly strong upturn in the course of this year,” he said.

Despite the woes of its manufacturers, Germany’s PMI reading rose above the 50 mark that separates growth from decline for the first time in 10 months. France’s reading also improved but remained fractionally in contraction territory.

The rest of the euro zone “saw the best performance ... despite growth slowing slightly”, S&P said.

There was an even stronger performance in the UK, where the flash composite PMI output index rose to 54 in April from 52.8 in March, well above the 52.6 forecast by economists polled by Reuters. – Copyright The Financial Times Limited 2024

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