August 3, 2018 / 8:11 AM / a year ago

Ebbing euro zone growth saps business optimism

LONDON (Reuters) - Business activity in the euro zone lost some momentum at the start of the third quarter, hampered by a drop in new orders that sapped optimism in the private sector, a survey showed on Friday.

FILE PHOTO: An employee push a cart with Borsalino hats in the factory in Alessandria, Italy, May 5, 2017. REUTERS/Alessandro Garofalo/File Photo

But the pace of growth remained fairly robust, supporting European Central Bank plans to end its 2.6 trillion euro (£2.4 trillion) stimulus programme this year, which policymakers reaffirmed last week.

IHS Markit’s Euro Zone Composite Final Purchasing Managers’ Index (PMI), seen as a good measure of economic health, fell in July to 54.3 from June’s 54.9, matching an earlier preliminary estimate. Readings above 50 indicate growth.

Adding to the marginally downbeat mood, retail sales in the 19 countries sharing the euro rose less than expected in June, volatile and often revised data from the European statistics office Eurostat showed.

“Overall, it’s not brilliant - the surveys have softened since the start of the year. It does suggest that the growth momentum in the euro zone is ebbing a little,” said Jessica Hinds at Capital Economics.

“It’s not really surprising we have seen a deterioration in the output figures but I don’t think that changes the fact the euro zone by past standards - and compared to its potential - is doing fairly well.”

The private sector in Germany, the euro zone’s largest economy, experienced slightly faster growth last month but in France - its second-biggest - growth eased a bit as the amount of new orders placed with service providers rose at a slower pace.

With the threat of a global trade war simmering, growth in Italy and Spain also slowed last month, likely encouraging the ECB to maintain its cautious approach to post-stimulus monetary policy.


“A holistic look at today’s PMI data suggests that the euro zone business cycle is down but not out. However, external risks lurk in the background and may prove a downer for sentiment,” said Oliver Rakau at Oxford Economics.

China said on Thursday it would retaliate if a U.S. threat to raise tariffs on its exports was carried out, fuelling fears that the trade dispute between the world’s two biggest economies would escalate.

Factory growth stuttered across the world in July, heightening concerns about the global outlook for trade in light of the intensifying conflict.

In Britain, preparing to leave the European Union, growth among services companies slowed in July by much more than expected, potentially raising further questions about the Bank of England’s decision to raise interest rates. [GB/PMIS]

On Thursday the Bank hiked rates to a post-financial crisis high of 0.75 percent, in part because it took the view the economy had recovered momentum after a weak start to the year caused by unusually bad weather.

In the euro zone, a sub-index measuring new orders fell to its second lowest level since the start of last year and, in a sign that firms see little chance of a turnaround anytime soon, the future output index fell to a 20-month low of 63.1.

Fleshing out that picture, firms across the bloc increased headcount at a weaker pace last month and built up backlogs of work at the shallowest rate in 1-1/2 years.

IHS Markit said the PMI pointed to third-quarter economic growth of around 0.3 percent, in line with a softer-than-expected expansion of 0.3 percent signalled by Eurostat data for the second quarter but weaker than the 0.5 percent predicted in a Reuters poll. [ECILT/EU]

July’s manufacturing PMI, released on Wednesday, showed factory growth remained subdued.

The final PMI for the bloc’s dominant services industry fell to 54.2 from June’s 55.2, below a preliminary reading of 54.4.

Services firms suffered a slowdown in new work, with the sub-index falling to 54.1 from 54.9, the second-lowest reading since the start of 2017.

editing by John Stonestreet

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