LONDON (Reuters) - Euro zone businesses rounded off the first quarter of 2018 with their slowest growth in over a year - and much weaker than expected - as new business took another hit from a stubbornly strong euro, a survey showed.
The euro zone’s economic boom had already paused in February and a Reuters poll earlier this month said growth had peaked, in news that may concern the European Central Bank as it looks to move away from an ultra-loose monetary policy.
There is also a risk the slowdown could be widespread as growth rates in Germany and France both eased back this month, according to IHS Markit’s Flash Purchasing Managers’ surveys, with German business confidence waning.
Global growth has been strong so far this year. But political uncertainty and the threat of trade skirmishes after the United States imposed tariffs on trade and aluminium imports means a slowdown may not be far away.
Yet that didn’t deter the U.S. Federal Reserve from raising interest rates again on Wednesday and forecasting at least two more hikes this year. The ECB isn’t expected to increase borrowing costs until next year.
According to the ECB’s regular economic bulletin published on Thursday, the euro zone economy is enjoying robust growth and may even outperform expectations in the near term. That in turn has pushed up the euro against the dollar.
“Fed policy tightening should stem upward pressure on the euro this year while a modest fiscal boost and an easing of fears about protectionism should help to support the German economy in particular over the quarters ahead,” said Jennifer McKeown at Capital Economics.
The Bank of England is expected to keep policy unchanged later on Thursday but appears to be teeing markets up for an interest rate hike in May.
BoE policymakers may be relieved for now that London has agreed to a transition deal with Brussels to leave trade relations between Britain and the European Union unchanged until the end of 2020 after its departure next year.
A further recovery in pay growth, according to separate official data published on Wednesday, was also interpreted as a sign the BoE is on course to raise rates in May when it publishes its next set of economic forecasts.
While the euro zone’s racing economy may have taken its feet off the pedals, growth remained strong.
The flash composite PMI, seen as a good guide to economic health, remained comfortably above the 50 mark that divides growth from contraction.
IHS Markit said the data pointed to robust first-quarter GDP growth of 0.7 percent, a touch faster than the 0.6 percent rate predicted in a Reuters poll.
However, the indicator did slump to 55.3 this month, far below all forecasts in a Reuters poll which had predicted a more modest dip to 56.7 from February’s final reading of 57.1.
“Even though the decline in the composite PMI seems quite dramatic, the immediate impact on the economy remains limited. Today’s data indicates a slowing of momentum, but still corresponds to healthy growth rates,” said Bert Colijn at ING.
But he too pointed to the strong currency as a concern.
“Export orders weakened quite markedly as well, a first sign that the stronger euro and global political uncertainty are dampening some of the euro zone growth potential.”
Since the start of the year the euro EUR= is up more than 2 percent against the dollar - and is expected to strengthen further - making the bloc's goods and services more expensive for foreign buyers.
So new business growth, which does include trade within the euro zone, tapered. The sub-index fell to 55.0 from 56.3, the lowest since the start of last year.
The currency’s strength affected the bloc’s dominant service industry. That PMI sank to a five-month low of 55.0 from 56.2, also below all forecasts in a Reuters poll which had predicted a reading of 56.0.
Also likely of concern to ECB policymakers, who have failed to get inflation anywhere near their 2 percent target ceiling, the output prices index eased to 52.4 from 52.9. Consumer prices rose less than expected in February, just 1.1 percent year-on-year.
Manufacturers had a similarly softer month. The factory PMI dropped two points to 56.6 from 58.6, matching the most pessimistic forecast in a Reuters poll. The median was for 58.1.
Earlier data also showed growth in Germany’s private sector lost a little steam in March as factory output slowed although Europe’s biggest economy remains on track for a solid expansion in the first quarter.
Business confidence there deteriorated for the second consecutive month in March but remained at an overall high level, another survey showed on Thursday, suggesting the economy will continue its solid upswing in coming months.
A stronger euro is also starting to put a cap on France’s manufacturing renaissance. Growth in factories’ output softened for the third consecutive month despite running at a decent clip.
There are no preliminary numbers for other euro zone countries.