Activity in the euro zone's dominant services sector burst into life in July as demand leapt and optimism grew about the global economy, a survey of more than 2,000 companies showed today.
The euro zone business activity index, which covers service companies ranging from airlines to banks to hotels, bounded through the 50 mark that divides shrinkage from growth to 50.2 in July from 48.2 in June.
It was above the 48.7 consensus and the first month of expansion since December 2002, when consumers and businesses were starting to shelve spending and investment plans because of uncertainty about war in Iraq.
Companies were also much more optimistic about future prospects, especially in Germany where planned tax cuts are helping to boost business morale after months of gloom. "Looking forward, there is no compelling anecdotal evidence to suggest that the trend will turn (back downwards) in coming months," said Mr Chris Williamson, chief economist at NTC Research, which compiles the survey.
The services survey, together with an equivalent survey of manufacturing which suggested that the sector could return to growth by September, may make the European Central Bank more cautious about further rate cuts.
However, both surveys leave the euro zone on course for economic growth of 0.1 per cent in the three months to July, according to PMI-based indicators of gross domestic product complied by NTC. The indicators showed stagnation in the previous three months.
A comparable survey of the US service sector published by the Institute for Supply Management is due at 3 p.m. today. The main index stood at 60.6 in June.
The euro zone employment index, little changed at 45.8 in July from 45.9, showed more jobs were lost than created for the 12th month running.
"Unemployment is a lagging indicator, but we know from the survey history that it can turn up quickly," said Mr Williamson. "That will be the key indicator in coming months."
Costs of raw materials rose as higher energy prices and a weaker euro currency against the dollar pushed up import costs, leaving the input prices index up at 52.9 in July from 50.2.
"Companies are also having to pay more to get the right quality of staff...perhaps an indication of a longer term trend of skills shortages," said Mr Williamson.
But he added: "Companies still have no pricing power...they are still having to offer discounts." The prices charged index was at 46.3 in July from 45.6.