November 4, 2009 / 2:52 PM / 10 years ago

UK, Europe services PMI around 2-year highs

LONDON (Reuters) - Europe provided more evidence of a rebound from recession on Wednesday with surveys suggesting service sector activity expanded at its fastest in 22 months in October in the euro zone, and in Britain at its briskest since August 2007, when the global credit crunch struck.

Meanwhile the World Bank raised its forecasts for East Asian economic growth, to 6.7 percent from 5.3 percent for this year followed by 7.8 percent in 2010, due to a Chinese rebound driven by aggressive fiscal and monetary stimulus.

The most striking news from a slew of surveys in Europe was that service sector activity grew for the first time in almost two years in Italy and rose strongly in Britain, although economists questioned the latter result.

The latest Purchasing Managers’ Indices (PMI), combined with similar survey-based gauges of manufacturing, pointed to a continued improvement beyond the third quarter, when euro zone GDP is believed to have started growing once again.

“Today’s data suggest that the recovery in the euro area is starting to broaden out,” said Colin Ellis, an economist at Daiwa Securities.

The euro zone index was boosted by a surge in activity in France and continued growth in Germany. Both of those economies grew in the second quarter, though the 16-member zone as a whole was still contracting.

The European Commission said on Tuesday it believed the zone, like elsewhere still relying heavily on government and central bank support, emerged from recession in the third quarter of this year with quarterly growth of 0.5 percent.

But it also saw growth slowing again to 0.2 percent in the fourth quarter. Both forecasts were close to those from Reuters’ latest poll of analysts.


Spain was the only one of the big four euro zone countries where the service sector PMI surveys showed continued shrinkage. But, at 47.7, the index was also at a 22-month high, as it was in Ireland, which along with Spain was harder hit in the latest global downturn by the collapse of bloated housing sectors.

In Britain, the PMI showed the services sector helped by growth in new orders, but analysts were wary about how much would translate into official growth numbers, which show the economy still contracting in the third quarter.

“We are putting less weight than usual on the PMIs, as recently they have diverged from official (UK) ONS data,” Daiwa economist Ellis said.

Wednesday’s figures followed similar survey data released on Monday that showed euro zone manufacturing industry activity expanded for the first time in 17 months during October.

Those combined rises pushed the Composite PMI, which couples the results of manufacturing and services surveys, to 53.0 from 51.1 in September. That was the highest reading since December 2007. Upwards of 50 is considered to signal expansion.

Across the world’s industrialised economies, central banks have slashed interest rates to combat a downturn many believed just a year ago could turn into a second Great Depression.

Government and central banks have so far said it is too early to withdraw that life support but they are starting to prepare for the moment when the economic recovery is surer.

The European Central Bank has slashed rates to a record low 1.0 percent and adopted a loose monetary policy.

Prices companies charge, however, remain under pressure. The composite output price index rose to 44.3 from September’s 43.5, signalling firms are still slashing prices to drum up business.

“Further steep job losses remain a concern, as does the need for companies to offer price cuts to win new business,” said Chris Williamson, an analyst with research consultancy Markit, who compile the PMI surveys.

The composite employment index remained under 50 for the 16th month as firms continue to cut jobs to reduce their costs. Official data released last week showed unemployment reached 9.7 percent in September — its highest since January 1999.

While the European Commission raised its GDP forecasts for the euro zone and wider European Union on Tuesday it also said it expected unemployment to keep rising this year and next, — to 10.7 percent in the euro zone next year from 9.5 this year and respectively to 10.3 from 9.1 percent in the 27-member EU.

editing by Patrick Graham

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