Friday 21 October 2016

Eurozone suprises in positive start to new year

Published 07/01/2016 | 02:30

ECB headquarters in Frankfurt
ECB headquarters in Frankfurt

The Eurozone's private sector has entered 2016 on solid footing as it expanded in the final months of last year at a pace not seen for four and a half years, according to a closely watched survey.

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And the expansion was broad based, with growth not only in Ireland but in Germany, France, Italy and Spain, according to the final Purchasing Managers' Index of the year.

Ireland topped the PMI league table, with Italy in second position followed by Germany.

It's welcome positive news just a day after data showed that inflation was weaker than expected, suggesting the European Central Bank's quantitative easing programme isn't effective.

Chris Williamson, economist with financial information firm Markit, which compiles the data, said the Eurozone economy starts the year on sound ground, well placed to enjoy "robust expansion".

"Growth of business activity continued to edge higher at the end of 2015, with an upturn in the PMI rounding off the strongest quarter for four-and-a-half years," he said.

Underpinning the latest expansion was a strong increase in new business in December, which helped push staffing levels up in Germany, Italy, Spain and Ireland.

But the pickup in activity came at the cost of companies cutting prices again, the data showed, and this may lead to renewed calls for further stimulus from the European Central Bank.

Mr Williamson sounded a note of caution on the prospects for economic growth in the bloc overall, and suggested the ECB's actions to date have done little.

"Despite the improvement, the data signal a modest 0.4pc increase in GDP in the fourth quarter, which would mean the Eurozone grew 1.5pc in 2015. Given that we have seen almost a year's worth of quantitative easing, there is a concern that policy is somewhat ineffectual."

So far, the ECB has failed to lift inflation anywhere near its 2pc target ceiling despite buying €60bn a month of mostly government bonds since March 2015.

Official data on Tuesday showed that annual inflation stood at 0.2pc in December, lower than expectations, while a core measure excluding energy and food prices slowed for the second straight month.

Closer to home, separate data showed that Ireland's services sector recorded a sharp monthly increase in activity, but down slightly from November.

The seasonally adjusted business activity index posted 61.8, down from 63.6. Anything above 50 signals expansion.

Evidence suggested that improving economic conditions and confidence among clients helped companies to secure more work.

Philip O'Sullivan, economist with Investec, which compiles the data in Ireland, said Irish service firms remain bullish about their prospects.

"Given the positive outlook for Ireland's key trading partners and the domestic resurgence, we share this confidence," he said.

But it was a less positive end to the year for the UK services sector. Growth there slowed slightly in December.

Mr Williamson said factors such as a potential interest rate hike, the prospect of a referendum on Britain's EU membership and uncertainty about the global economy posed "significant downside risks".

And that uncertainty was evident yesterday again as stocks fell around the world and commodities slid after China's central bank set the yuan's reference rate at an unexpectedly weak level.

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