January 24, 2018 / 10:28 AM / in a year

UPDATE 1-Euro zone businesses start 2018 on decade high as work floods in

    * Jan flash composite PMI 58.6, highest since June 2006
    * PMI points to Q1 GDP growth of 1.0 pct -IHS Markit
    * Composite, services PMIs above all f'casts in Reuters poll
    * Manufacturing PMI below all f'casts in Reuters poll

 (Adds comment, details)
    By Jonathan Cable
    LONDON, Jan 24 (Reuters) - Euro zone businesses kicked off
2018 in much better shape than anyone polled by Reuters
expected, ramping up activity at the fastest rate since the
middle of 2006, a survey showed on Wednesday.
    The upturn was driven by a strong performance in the bloc's
dominant service industry, where new business flooded in at a
rate not seen in over a decade. That will cheer the European
Central Bank as it moves towards tighter monetary policy.
    IHS Markit's composite flash Purchasing Managers' Index
(PMI) for the euro zone jumped to 58.6 this month, its highest
since June 2006 and confounding the median forecast in a Reuters
poll for a dip to 57.9 from a final December reading of 58.1.
    Anything above 50 indicates growth and the preliminary
reading was higher than any estimate given by the 33 economists
Reuters polled.
    "The PMI adds to the list of positive January indicators. We
believe 2018 could again be a year in which euro zone growth
beats expectations," said Bert Colijn at ING.
    Consumer confidence jumped much more than expected this
month to a 17-year high, a flash estimate from the European
Commission showed on Tuesday, further underlining the momentum
in an economy growing at its fastest in a decade.             
    French business activity was stronger than expected and
Germany's private sector continued to grow robustly in January,
according to earlier data, showing the bloc's two biggest
economies had a strong start to 2018.                          
    IHS Markit said if maintained the euro zone PMI pointed to
first quarter GDP growth of 1.0 percent, much faster than the
0.6 percent predicted by a Reuters poll last week.           
    In other good news for ECB policymakers, who have failed for
years to get inflation up to where they want it, price pressures
increased. The output prices sub-index bounced to 54.6 from
53.2, a level not seen for almost seven years.
    "On the face of it, the data strengthen the case for the ECB
to 'revisit' its forward guidance early this year, as it has
hinted it will," said Jessica Hinds at Capital Economics.
    "But with core inflation still subdued and the euro
continuing to strengthen, we expect that the ECB will tread very
cautiously at tomorrow's (Thursday's) meeting."
    Earlier this month, the ECB signalled a growing appetite for
revising its policy message in "early" 2018. But it is unlikely
to ditch a pledge to keep buying bonds at Thursday's meeting as
rate setters need more time to assess the outlook for the
economy and the euro, three sources close to the matter said.
    The U.S. dollar hit fresh lows on Wednesday following the
PMI data and after U.S. Treasury Secretary Steven Mnuchin said
he welcomed the greenback's weakness.             
    The PMI covering the bloc's dominant service industry bucked
a forecast for a slight dip to 56.4, instead rising from
December's 56.6 to 57.6, the highest since August 2007.
    That increase came after firms reported new business
accelerating and the sub-index was 57.2, up from 56.7 and its
highest since August 2007.
    Manufacturers, however, performed less well than predicted.
The sector's PMI fell to 59.6 from December's 60.6 and was below
all 42 forecasts in a Reuters poll whose median was 60.3.
    An index measuring output which feeds into the composite PMI
suffered a similar fate, slipping to 61.1 from 62.2.
    "That suggests that the recent strength of the euro and the
rise in oil prices at the margin may have dented activity in the
industrial sector," Hinds said.
    Since the ECB's December meeting the euro has gained around
5 percent, making the bloc's goods more expensive abroad.
    Still, the three-month average of the headline number,
ironing out fluctuations over the Christmas period when numbers
are more volatile due to factory closures, was nevertheless the
highest on record.
    Also suggesting the fall might be a blip, an index measuring
future output -- or expectations -- rose to a survey high of
67.9 from 67.6.

 (Editing by Catherine Evans)
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