March 5, 2008 / 12:46 PM / 12 years ago

European business defies global gloom in February

PARIS (Reuters) - European business activity picked up in February despite a prevailing mood of anxiety about the potential fallout from U.S. economic downturn, though Italy and Spain lagged seriously, surveys showed on Wednesday.

Separate retail sales reports for January suggested an upturn many economists have long predicted in consumer spending has yet to materialize, perhaps because households are worried by rising food and energy bills as commodity prices soar.

“The latest euro-zone data provide some cause for concern, with country-level divergences in overall economic activity building and growth in the region as a whole still failing to rebalance towards consumer spending,” said Jennifer McKeown, economist at Capital Economics, a London-based consultancy.

Surveys of corporate purchasing managers showed healthy acceleration in service sector growth in Britain and France, more tentative progress in Germany, but bad shows from Spain, Italy and Ireland.

For the euro currency zone as a whole, the RBS/NTC Eurozone Purchasing Managers Index (PMI) rebounded in February from a slump a month earlier which heightened concern about Europe’s ability to weather a sharp U.S. downturn.

The euro zone PMI reading for February was 52.3, up from 50.6 in January, which was a 4-1/2-year low and also perilously close to 50, the dividing line between growth and contraction.

“While the February services purchasing managers survey may dilute some of the deepest pessimism over the euro zone, it does not fundamentally alter belief that the economy is struggling in the face of weaker global economic environment,” said Howard Archer, economist at Global Insight, a consultancy.

He cited tighter credit, financial market turmoil, and a high euro as well as high oil, food and other commodity prices.

Despite news earlier this week that other PMI surveys showed slippage in the growth pace in manufacturing, the rebound in the services sector was enough to lifted the catch-all PMI index for business as a whole in the euro zone in February.

The composite PMI index rose to 52.8, from 51.8 in January.

On the consumer front, the latest news was mixed.

Data from the European Union statistics office showed retail sales in the 15 countries using the euro rose 0.4 percent in January after three straight months of shrinkage but dipped 0.1 percent year-on-year, the third decline in a row.

Some analysts saw this as the seeds of improvement. Others interpreted it as unconvincing in a month of the year when many consumers tend to do a lot of their spending due to it being a major discount sales period.


Economists were surprised by the strength of performance on the business front, particularly in Britain and France.

Outside the euro zone, British service sector growth picked up at its fastest rate since September, surprising forecasters. The same survey showed inflation pressures surged at their strongest in at least 12 years however.

Britain’s services sector, which accounts for around three quarters of the economy, much like the rest of western Europe, has grown every month for nearly five years although the pace slowed sharply towards the end of last year.

Economist Philip Shaw said this made it even more likely the Bank of England would keep interest rates on hold when it meets on Thursday and might restrain the temptation to cut rates later in the year.

Within the 15-country euro zone, Germany and France, biggest and second-biggest economies, fared well in the latest services sector PMI readings for February, with France showing a marked acceleration, with a healthy index reading of 58.2.

Germany bounced back from contraction in the first month of the year, to 52.2 from 49.2.

In stark contrast, Spain and Italy remained below 50 for the third and second consecutive month, respectively. Italy’s services PMI fell to its lowest in the survey’s 10-year history.

Spain, where the Socialist government faces a parliamentary election on March 9, showed hints of stagflation, where growth slows to a trickle but prices keep rising.

Its service sector shrank and business confidence hit a record low, while input cost inflation hit a seven-year high.

That makes life harder for the European Central Bank, which set one interest rate for the euro zone as a whole. The ECB meets on Thursday and markets expected it to leave interest rates unchanged.

with reporting by European bureaus, editing by Mike Peacock

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