Euro services, manufacturing show surprise strength

Euro-area services and manufacturing expanded faster than economists forecast in April, indicating the economy continued to strengthen at the start of the second quarter.

A composite index based on a survey of purchasing managers in both industries rose to 54 in April from 53.1 in March, London-based Markit Economics said today. A reading above 50 indicates expansion.

The report supports European Central Bank president Mario Draghi's view that the 18-nation euro area is in a "modest" recovery.

Still, the crisis in the Ukraine and the strength of the euro are threatening to undermine growth, while Markit’s survey may reinforce policy makers’ deflation fears, showing that companies cut prices for a 25th straight month.

“While the crisis in Ukraine remains the biggest risk to our optimistic outlook for euro-zone growth, the April PMIs show no evidence that the situation has had any major impact so far,” said Christian Schulz, senior economist at Berenberg Bank in London.

“In the short-run, below-expectation inflation figures could still trigger more action, but the arguments of the hawks are certainly being strengthened by the buoyant economic performance in large parts of the euro zone.”

Markit said its euro-area manufacturing index rose to 53.3 in April from 53 in March, while a services gauge increased to 53.1 from 52.2. Both exceeded economists’ forecasts. The increase in Europe stands in contrast to China, where the preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit was 48.3 in April, remaining below the expansion- contraction dividing line of 50.

“The euro zone has started the second quarter on a solid footing,” said Chris Williamson, chief economist at Markit. “The big concern will be the outlook for prices. There will be growing fears that deflationary pressures are intensifying and that the ECB needs to respond with more than just words to the recent appreciation of the exchange rate.”

In Germany, a composite of both manufacturing and services rose to 56.3 from 54.3, while a French measure declined to 50.5 from 51.8. The reports also pointed to easing price pressures, with the German survey showing that input costs were unchanged in April, ending a nine-month period of rising prices.

Mr Draghi said this month that policy makers were “unanimous” in their willingness to use unconventional measures to fend off the risk of falling prices. Inflation in the euro area slowed to 0.5 per cent in March, which compares with the ECB target of below but close to 2 per cent.

Bloomberg