Euro zone business growth picks up slightly but still muted

By Jonathan Cable

LONDON (Reuters) – Euro zone business activity expanded a touch faster than expected last month as the region appeared, so far, to have largely shrugged off Britain’s vote to leave the European Union, a survey found.

The latest increase, which came alongside some of the fastest hiring growth in the euro zone since before the financial crisis in 2008, was led by a surge in Germany, masking stagnation in France and a slower pace in Spain and Italy.

Euro zone business growth is now in stark contrast to Britain, where a survey suggested its economy is shrinking at the fastest rate since the financial crisis after a sharp hit to activity following the EU referendum in June. [GB/PMIS]

Markit’s final composite Purchasing Managers’ Index for the euro zone, released on Wednesday, was 53.2 in July, above a flash estimate of 52.9 and June’s 53.1. It has been above the 50 mark that divides growth from contraction since mid-2013.

“The composite PMIs have held up a little better than people expected after the UK’s Brexit vote but that doesn’t change the fact that growth is still weak and not doing enough to pick up core inflation,” said Stephen Brown at Capital Economics.

“Even though the composite PMIs and surveys have done a bit better than expected that doesn’t change the fact that there is still pressure on the ECB to take more action.”

Last month, the European Central Bank left interest rates unchanged but said more stimulus could be on the way. A July Reuters poll suggested it would soon be forced to extend and expand the scope of its asset purchase program. [ECILT/EU]

Despite years of ultra-loose monetary policy, inflation is nowhere near the central bank’s 2 percent target ceiling and is not expected to get there until at least the end of 2017.

Of some relief to policymakers though, a sub-index measuring output prices jumped to a 10-month high of 49.8 from June’s 49.1, an indication firms barely cut prices.

Economic growth in the euro zone halved in the second quarter to 0.3 percent and Markit said if sustained the latest PMI reading pointed to a similar pace in the current quarter. Last month’s Reuters poll predicted the same.

GERMAN LEAD

According to the PMIs, growth is being led by Germany, where a stronger expansion in services boosted private sector activity last month to its highest this year, although some companies were less optimistic following Britain’s vote to leave the EU.

But France’s composite PMI barely tipped over the break-even mark while the Italian and Spanish ones both fell.

Across the euro zone, activity in the dominant service industry ticked up from June. Its PMI edged up to 52.9 from 52.8, higher than the flash 52.7 reading.

In a sign service firms expect a further improvement this month, they increased headcount at the fastest rate since early 2008. The employment index rose to 53.7 from 53.1.

“The improved hiring trend suggests firms have gained sufficient confidence in the durability and sustainability of the upturn to expand capacity in increasing numbers,” said Chris Williamson, Markit’s chief economist.

But the euro zone has a long way to go to get unemployment down. It is at 10.1 percent, which masks great variety across member states. Unemployment is just above 6 percent in Germany but one in five people in Spain are out of work.

Echoing the slow and steady picture painted by the PMIs, an official report from Eurostat showed retail sales – a proxy for household spending – were stable in June across the currency bloc.

(Editing by Janet Lawrence)