Wednesday 7 December 2016

Euro zone business growth at four-year high as firms cut prices

Published 23/11/2015 | 10:37

New VW cars stand ready for shipping next to the Volkswagen plant in Emden, northwestern Germany, as chairman Hans Dieter Poetsch
described the situation at the firm as an “existence-threatening crisis”. Photo: AFP
New VW cars stand ready for shipping next to the Volkswagen plant in Emden, northwestern Germany, as chairman Hans Dieter Poetsch described the situation at the firm as an “existence-threatening crisis”. Photo: AFP

Business activity in the euro zone picked up at its fastest pace since mid-2011 this month - and far faster than expected - as a weak currency and price cutting helped drive new orders, a survey showed on Monday.

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While the upturn in activity may be welcomed by European Central Bank policymakers the discounting by firms suggests the ultra-loose monetary policy is doing little to get inflation anywhere near their 2 percent target ceiling.

"These are good numbers. For the region as a whole you are looking at growth of 0.4-0.5 percent. You are not only seeing activity hitting highs but also employment, backlogs and new business," said Chris Williamson, chief economist at survey compiler Markit.

"The caveat to that is it's not that different to what we have seen throughout the year, and the ECB is going to be disappointed with the growth rate given the stimulus already in place."

A Reuters poll published earlier this month suggested growth would be 0.4 percent.

Markit's Composite Flash Purchasing Managers' Index, based on surveys of thousands of companies and seen as a good guide to growth, jumped to a more than four-year high of 54.4 this month from October's 53.9.

That beat the median forecast for 53.9 in a Reuters poll.

The index has been above the 50 mark that separates growth from contraction since July 2013.

Markit said nearly half the feedback was collected before last week's Paris attacks and an earlier French composite PMI slumped to a three-month low of 51.3 from October's 52.6. This was offset by Germany's, which rose to 54.9 from 54.2.

However, some of that growth was driven by firms cutting prices for a second month. The composite output price index for November was unchanged from October's 49.6.

"It's a sign this growth is only taking place at the expense of margins. The ECB is not going to look at these numbers and think everything is alright. They are going to think it still needs a push," Williamson said.

Despite the ECB injecting 60 billion euros a month of new money through its bond-buying programme since March to support growth and inflation, prices rose only 0.1 percent last month.

It is expected to expand the programme in December.

Factories also benefited from a weaker euro EUR=, which makes their goods and services cheaper for foreign buyers. The common currency has fallen around 12 percent this year.

New export orders came in at their fastest rates in six months, with the sub-index registering 52.8 compared with October's 52.7. That drove the manufacturing PMI up to a 19-month high of 52.8 from 52.3.

An index measuring output, which feeds into the composite PMI, rose to 53.9 from 53.6.

The bloc's dominant service industry expanded at its fastest rate since May 2011. Its PMI reading climbed to 54.6 from 54.1, encouraging firms to increase headcount.

The service sector hired staff at the fastest rate in five years, with the related index climbing to 52.8 from 52.3.

Reuters

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