July 3, 2019 / 8:09 AM / 13 days ago

Euro zone June business growth slow as factories still faltering

LONDON (Reuters) - Euro zone business activity picked up slightly last month but remained weak as a modest but broad-based upturn in the services industry offset a continued deep downturn in factory output, a survey showed.

FILE PHOTO: General view of the skyline of La Defense business district with its Arche behind Paris' landmark, the Arc de Triomphe and the Champs Elysees Avenue in Paris, France, January 13, 2016. REUTERS/Charles Platiau/File Photo

Worryingly for policymakers at the European Central Bank, who are under pressure to support growth, forward-looking indicators did not point to a bounce back and business expectations for the year ahead dropped.

By the end of September, the ECB will either cut its deposit rate or ease its forward guidance further by pledging to keep interest rates lower for longer, according to a majority of economists in a Reuters poll. [ECILT/EU]

The European Union’s nomination of IMF chief Christine Lagarde to replace Mario Draghi at the helm of the ECB has reinforced expectations for easier monetary policy going forward.

Wednesday’s release of IHS Markit’s Euro Zone Composite Final Purchasing Managers’ Index (PMI), considered a good measure of overall economic health, will also do nothing to change those views. It only nudged up to 52.2 in June from May’s 51.8.

That was a touch higher than a preliminary reading of 52.1 but it remained close to the 50 mark separating growth from contraction.

The upturn was nevertheless evident throughout much of the euro zone, and earlier figures from three of the bloc’s biggest economies — Germany, France, and Spain — showed services activity accelerated.

“The continued stagnation in Italy is a worry, while the small rebound in the Spanish services sector is encouraging,” noted Nicola Nobile at Oxford Economics.

“Nonetheless, we continue to see the ECB headed for another dose of monetary policy easing in September as it attempts to reinvigorate the region’s economy.”

IHS Markit said the survey was indicative of GDP rising just over 0.2% in the second quarter, weaker than the 0.3% predicted in last month’s Reuters poll.

It was a different story in Britain, where the PMI suggested the economy contracted 0.1% last quarter as firms worried about Brexit and the slowing global economy. [GB/PMIS]

The robust German, French and Spanish readings helped a PMI covering the wider euro zone services industry bounce to 53.6 from May’s 52.9, a counterweight to a fifth month of contraction in manufacturing. [EUR/PMIM]

“There is for now fairly little evidence of the protracted manufacturing weakness causing significant adverse spill-overs into the euro zone’s domestic economy,” wrote Nobile.

Monday’s factory PMI indicated there will be a slow start to the second half for manufacturers as new orders fell for a ninth month, stocks of raw materials were depleted again, backlogs of work were run down and headcount was reduced for a second month.

While most of the forward-looking services indexes were positive they remained weak, and new export business — which includes trade between member countries — fell for a tenth month. The sub-index registered 49.4 compared to May’s 48.2.

Citing trade war worries, rising geopolitical uncertainty and slowing global economic growth, firms were less optimistic. The composite future output index fell to 59.2 from 59.8, one of its lowest readings in over four years.

Editing by Catherine Evans

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