Eurozone Economy Appears to Slow, PMI Survey Suggests

The eurozone economy appears to have slowed slightly as it entered the final quarter of what has been a strong year, but that is unlikely to deter the European Central Bank from announcing a reduction in its bond purchases.

Data firm IHS Markit on Tuesday said its composite Purchasing Managers Index for the eurozone — based on survey responses from 5,000 manufacturers and service providers — fell to 55.9 in October from 56.7 in September. A reading above 50.0 signals an expansion in activity.

The decline in the measure was larger than expected, and was driven by services companies, which rely more heavily on domestic demand than their manufacturing counterparts.

However, there were signs of strength in other parts of the eurozone economy that will likely reassure ECB policy makers as they prepare for a crucial meeting Wednesday and Thursday.

The survey recorded the fastest growth in employment in over a decade, which keeps alive hopes that wages will accelerate and help generate the sustained pickup in inflation sought by the ECB.

And the measure of activity in the eurozone’s factories rose to its highest level in six-and-a-half years, an indication that the euro’s appreciation this year has yet to weaken exports.

“Firms don’t appear to have been unduly affected by recent euro strength, with growth of new export orders accelerating in October,” said Andrew Harker, an economist at IHS Markit. “Healthy demand in export markets appears to be outweighing any negative currency impacts.”

The eurozone economy appears to be on course for its strongest year since 2007, with the ECB’s economists forecasting an expansion of 2.2% compared with 1.8% in 2016.

Its performance this year has surprised most economists, who had expected growth to slow in the face of increased levels of political uncertainty and higher energy prices. That resilience means the recovery probably needs less support from the central bank.

In response, economists expect the ECB’s governing council to announce Thursday that it will reduce its bond purchases from January.

However, the annual rate of inflation is still well short of the ECB’s inflation target, and that is a problem for policy makers. There were signs in the survey of purchasing managers that businesses raised their prices at the fastest rate since June 2011, but that would still leave inflationary pressures at historically modest levels.

“While the price components of the PMI survey picked up in October, they are still subdued by past standards,” said Stephen Brown, an analyst at Capital Economics. “So alongside a tapering announcement we expect the ECB to strengthen its forward guidance to indicate that interest rates are unlikely to rise until 2019.”
Source: Dow Jones

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