August 23, 2018 / 8:10 AM / a month ago

Euro zone summer shutdown casts some clouds over growth: PMI

LONDON (Reuters) - Europe’s summer shutdown kept euro zone business growth on ice this month as activity picked up less than expected, while prospects of a growing trade war clouded the outlook, a survey showed on Thursday.

Survey compiler IHS Markit cautioned the August data were based on a much smaller sample size than usual, particularly amongst manufacturers where there were about half the normal number of respondents for some countries.

“Always treat August data with some caution for the euro zone, especially in core countries such as France, Italy and Spain, where factories go through lengthy closures. Less so in Germany,” said Chris Williamson, chief business economist at IHS Markit.

IHS Markit’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI), seen as a good gauge of economic health, nudged up in August to 54.4 from 54.3, coming in just below a median forecast in a Reuters poll for 54.5. A number above 50 indicates growth.

So although growth remained somewhat sluggish, August’s results are unlikely to upset policymakers at the European Central Bank who intend to close their 2.6 trillion euro asset purchase program by year-end.

“August’s small increase in the euro zone PMI suggests that the region’s economy is performing well in Q3, which will reassure the ECB that it is right to be normalizing monetary policy very gradually,” said Jessica Hinds at Capital Economics.

IHS Markit said the PMIs indicate GDP growth this quarter at around 0.4 percent, matching a forecast in a Reuters poll.

This year and next the euro zone economy will only muddle through, with steady but modest growth in a slowdown from 2017, according to economists in a Reuters poll on Wednesday, which showed a majority expecting a brewing U.S.-led trade war to hold back expansion. [ECILT/EU]

Germany’s services sector continues to provide a temporary cushion to the economy against a cooling trend in manufacturing, confirming the vulnerability of the world’s export champion to rising trade frictions, earlier data showed.

In France, the only other euro zone country to publish flash data, activity grew in August, beating forecasts, as a faster expansion of the country’s services and manufacturing sectors helped the bloc’s second-biggest economy bounce back from recent signs of a slowdown.

CLOUDS GATHERING

However, the future output index - which measures optimism - sank to a near two-year low of 61.3 from 63.1. That suggests businesses were not hopeful there would be an acceleration anytime soon.

“Concerns about activity in the coming months remain,” said Bert Colijn at ING. “While the meeting between European Commission President Jean-Claude Juncker and U.S. President Trump has brought the trade conflict into calmer waters, businesses have not taken that as a reason to be optimistic.”

In a further sign of wavering optimism, factories kept their stocks of purchases - the amount of raw materials they hold - at the same level as in July. The sub-index was right on the break-even 50 mark, down from 52 and its lowest in a year.

There was only a modest revival among firms operating in the bloc’s dominant service industry. The services PMI rose to 54.4 from July’s 54.2, matching expectations in a Reuters poll but a far cry from levels seen at the turn of the year.

They did increase headcount though at the fastest rate since October 2007 - before the financial crisis really hit - but the employment index tends to be a lagging index. It jumped to 55.1 from 54.6.

Factory growth decelerated much faster than expected. The manufacturing PMI fell to a 21-month low of 54.6 from July’s 55.1, matching the lowest forecast in a Reuters poll.

An index measuring output, which feeds into the composite PMI, nudged up to 54.5 from 54.4.

Audi electric engine is seen at the Audi Factory in Gyor, Hungary, July 24, 2018. REUTERS/Bernadett Szabo

Editing by David Evans

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