Euro zone businesses end year on a high note - PMI

LONDON (Reuters) - Businesses across the euro zone ended the year on an upbeat note as expected, according to a survey that showed they achieved solid growth and raised prices at the steepest rate since the middle of 2011.

Employees use sewing machines as they work at the Royal Mer Bretagne factory, a specialist in French manufactured knitted clothes, in La Regrippiere, western France, November 28, 2016. REUTERS/Stephane Mahe

The positive survey will please policymakers at the European Central Bank, who in a surprise move last week trimmed their asset purchases but promised protracted stimulus to aid a still-fragile recovery and bolster weak inflation.

IHS Markit’s Euro Zone Flash Composite Purchasing Managers’ Index, seen as a good overall growth indicator, matched November’s 53.9, which was the highest reading this year and comfortably above the 50-point line that indicates growth. That was in line with the median forecast in a Reuters poll.

“The PMI points to a decent end to the year for euro zone activity,” said Stephen Brown at Capital Economics.

“But with a number of political risks approaching and the boost to consumers’ real income growth from lower energy prices now fading, the strong level of activity implied by the PMI and other surveys seems unlikely to last.”

Elections in Germany, France and the Netherlands next year threaten to challenge the status quo while the full aftermath of Britain’s shock decision in June to leave the European Union has yet be felt.

Markit said the PMI pointed to the bloc’s economy growing around 0.4 percent this quarter, in line with a Reuters poll published earlier this month, and an uptick from the 0.3 percent in the third quarter.

Investors largely ignored the PMI data, instead digesting news of the U.S. Federal Reserve’s interest rate hike on Wednesday and its signal that more rises would follow and at a faster pace next year.


The growth upturn came as an output price index jumped to 51.4 from 50.6, its highest reading since July 2011.

“This means that early 2017 could well see the return of rising core inflation in the euro zone, which the ECB has been eagerly awaiting,” said Bert Colijn at ING.

ECB President Mario Draghi predicted last month inflation would finally rise back to the bank’s target of almost 2 percent by 2018 or 2019 after missing it for more than three years.

But last week the ECB predicted inflation would reach only 1.7 percent in 2019 and said higher energy prices could boost consumer prices without lifting the underlying trend.

Official data due on Friday are expected to confirm prices rose 0.6 percent in the bloc in November, putting inflation at a 31-month high.

Humming factories in Europe’s biggest economy offset a slight slowdown in activity at services companies and Germany’s private-sector growth is on track for its strongest quarter in 2-1/2 years, an earlier survey showed.

It was a similar story in France, where activity ended the year on an unexpectedly bright note, with industrial companies expanding at the fastest pace in 5-1/2 years while growth in the dominant service sector also improved noticeably.

“The limited country data for Germany and France presented good news for both of the euro zone’s largest two member states,” Brown said.

Taken as whole, manufacturing growth in the euro zone increased at the fastest pace since April 2011. The factory PMI was 54.9, up from 53.7, way above even the most optimistic forecast of 54.1 in a Reuters poll of 34 economists.

A sub-index measuring output, which feeds into the composite PMI, climbed to a 32-month high of 56.1 from 54.1.

Factories built up backlogs of work at the fastest rate since April 2011, suggesting they will start the new year in good shape. The sub-index climbed to 54.8 from 53.3 and a new orders index also jumped.

“People are underestimating the impact the weaker euro is having. You have the twin impacts of increased export performance to non-euro countries, but also within the euro area you are getting more import substitution,” Chris Williamson, chief business economist at Markit said.

Growth in the bloc’s dominant service sector slowed from November’s 11-month high, however, with PMI dipping to 53.1 from 53.8. That was below even the most pessimistic forecast in a Reuters poll which predicted no change from last month.

Still, businesses were confident about the future and the business expectations index rose to an eight-month high of 63.6 from 61.9.

Editing by Catherine Evans