June 21, 2019 / 8:07 AM / 5 months ago

Euro zone business growth stayed weak in June as optimism wanes

LONDON (Reuters) - Euro zone business activity picked up a touch this month but worries about slowing global growth and the impact of spreading trade conflict meant firms were at their least optimistic in nearly five years, a survey showed.

FILE PHOTO: A businessman walks on the esplanade of La Defense, in the financial and business district in La Defense, west of Paris, April 10, 2014. REUTERS/Gonzalo Fuentes

Activity was at its strongest since November but it was unbalanced, with manufacturing activity contracting for a fifth month, overshadowing a small uptick in the services industry.

The downbeat showing comes just days after European Central Bank President Mario Draghi signalled one of the biggest policy reversals of his eight-year tenure and said the Bank would ease policy again if inflation failed to accelerate.

Despite years of ultra-loose monetary policy, prices have failed to rise as fast as the ECB wants, while a slew of recent data have suggested growth is slowing.

IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI), which is considered a good guide to economic health, only nudged up to 52.1 this month from a final May reading of 51.8, beating the median expectation in a Reuters poll for 51.8.

Earlier figures from the bloc’s two biggest economies, Germany and France, remained weak but surprised on the upside, offering a boost to European equities.

“The small improvement in the flash PMIs for June will not be enough to deflect the ECB from its new plan to ease policy within the coming months,” said Andrew Kenningham, chief Europe economist at Capital Economics.

Kenningham reckons the ECB will formally strengthen its forward guidance next month and then cut the deposit rate by 10 basis points to -0.5% in September.

A Reuters poll last month, taken before Draghi’s comments, found no prospect of the ECB raising interest rates through to the end of 2020 and that its next policy move would be to tweak its forward guidance towards more accommodation.

MISMATCH

IHS Markit said the PMI pointed to GDP growth of just over 0.2% this quarter, below the 0.3% predicted in the Reuters poll.

Firms in the bloc’s dominant service industry staged a modest upturn, with that PMI rising to 53.4 from May’s 52.9, ahead of expectations for no change.

But manufacturing activity contracted again. The factory PMI held well below the 50 mark separating growth from contraction, registering 47.8 compared to last month’s 47.7 and missing expectations for 48.0.

An index measuring output, which feeds into the composite PMI, dipped to 48.8 from 48.9.

“The dichotomy between services and manufacturing is only getting larger. The big question remains for how long this can continue,” said Bert Colijn, a senior economist at ING.

Demand declined for a ninth month, and factories were running down backlogs of work to stay active, as they have since September. The new orders sub-index held steady at May’s 46.6.

As demand also remained weak for services, firms there barely increased headcount this month. The employment index fell to 53.8 from 54.0.

With forward-looking indicators painting a downbeat picture, optimism waned. The composite future output PMI fell to 58.7 from 59.8, its lowest reading since October 2014.

Purchasing managers were concerned about weakening global growth, trade conflict, dampened demand conditions and rising geopolitical risks, IHS Markit said.

The United States has hit the European Union with tariffs and threatened more. On Tuesday, U.S. President Donald Trump criticised Draghi’s comments that further monetary policy changes may be needed by the ECB, saying it would spark unfair European competition against the United States.

Editing by Catherine Evans

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