Thursday 21 November 2019

Eurozone economy hits 'speed bump' as growth cools

Mario Draghi is likely to tread softly as the European Central Bank inches towards bringing an end to its monetary stimulus efforts (AP)
Mario Draghi is likely to tread softly as the European Central Bank inches towards bringing an end to its monetary stimulus efforts (AP)

Economic activity across the 19-country eurozone cooled slightly in July as the region struggled to keep up the pace of its recent upturn, according to a new survey.

Financial information firm IHS Markit said its headline purchasing managers' index for the region fell to a six-month low of 55.8 points in July from 56.3 the previous month.

The survey is closely monitored by the European Central Bank (ECB).

Despite the modest retreat, the indicator pointed to one of the strongest expansions seen in the past six years, with quarterly growth at a still-healthy 0.6%, down slightly from the 0.7% signalled for the second quarter.

Official second quarter figures are due at the start of August and are expected to show that the eurozone at least matched the 0.6% growth recorded in the first three months of the year.

A run of economic news has pointed to a pick-up in growth across the eurozone countries amid rising confidence in the region's outlook following a series of elections which saw populist politicians defeated.

Chris Williamson, IHS Markit's chief business economist, said it is "too early to know for sure whether the economy has merely hit a speed bump or whether the upturn is already starting to fade".

The evidence "points to the former", he said, with the economy "hitting bottlenecks due to the speed of the recent upturn".

He noted that forward-looking indicators, such as new order inflows, suggest further robust growth in coming months. As a result, job creation is "booming" as companies seek to expand capacity to meet the demand.

The survey is likely to inform the ECB's deliberations as it mulls over when to start reining in its monetary stimulus.

Last week, ECB president Mario Draghi sought to be neutral, worried that any indication of any change of course could lead to the euro currency surging. More clarity is expected in the autumn.

Much will depend on the inflation outlook. The chief purpose behind the ECB's stimulus efforts, which has involved slashing interest rates and buying 60 billion euro (£53 billion) a month in bonds at least until the end of the year, is to stoke price pressures in the economy to get inflation up to its goal of just below 2%.

In the year to June, the annual rate of inflation was 1.3%. Monday's survey suggested that inflation pressures eased in July, which may reinforce Mr Draghi's belief that there isn't "any convincing sign of a pick-up in inflation".

The ECB meets next to decide on policy on September 8.


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