Business World

Wednesday 11 December 2019

Eurozone business grew at slowest rate in August

Jonathan Cable

Eurozone business grew at the slowest rate this year in August and retail sales plummeted in July as escalating tension between Russia and Ukraine subdued spending and investment, surveys showed yesterday.

Signs of slower growth, coupled with firms cutting prices at an even faster rate but still failing to drum up sales, will add to pressure on the European Central Bank ahead of tomorrow's monetary policy meeting.

"The euro area is still just about expanding but the direction is downwards and the risk is we get more of the same as we move through the next few months as the geopolitical factors weigh heavily," said Ken Wattret at BNP Paribas.

"It's pretty obvious the ECB is worried, and rightly so. The pressure will continue."

Optimism about the future among service firms, which dominate the bloc's economy, fell to its lowest level this year amid rising tension over Ukraine that triggered sanctions from the West and countermeasures from Russia.

Although the Ukrainian president's press office said today he had reached agreement with Russia's Vladimir Putin on a "permanent ceasefire" in eastern Ukraine's Donbass region, uncertainty about the situation on the ground remained.

The Kremlin later said the presidents had agreed on steps towards peace but a ceasefire had not been agreed between Moscow and Kiev because Russia is not a party to the conflict.

World markets jumped after the initial declaration before trimming gains - Britain's top share index touched a 14-1/2-year high.

Markit's Composite Purchasing Managers' Index (PMI), which is based on surveys of thousands of companies across the region and is seen as a good gauge of growth, fell to an eight-month low of 52.5, well below July's 53.8.

That final reading was also weaker than a preliminary estimate of 52.8, although it was the 14th month above the 50 line that denotes growth.

The euro zone economy stalled in the second quarter and private sector growth in Germany, Europe's powerhouse, eased to a 10-month low in August.

In France activity declined for a fourth month while business activity in Italy's service sector unexpectedly shrank for the first time in five months.

In another sign of weakness, retail sales across the region fell 0.4pc in July as expected, the first drop this year.

In Britain, the services industry expanded at the fastest pace in nearly a year last month, suggesting some companies were struggling to keep up with demand, a factor the Bank of England is likely to note as its ponders when to raise interest rates.

While no change is expected at today, the BOE is touted to be the first major central bank to raise interest rates early next year.

"The UK domestic economy continues to roar ahead," said Rob Wood, chief UK economist at Berenberg Bank.

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