Business activity in the euro zone slowed more sharply in May than first estimated, a sign that weak prices are undermining the area's recovery from its debt crisis.
The results of a survey of 5,000 businesses across the euro zone comes a day ahead of a meeting of the European Central Bank's governing council, at which policy makers are expected to agree a series of measures designed to boost growth and the annual rate of inflation.
Data firm Markit said its composite Purchasing Managers Index for the euro zone--which measures activity across both the manufacturing and services sectors--fell to 53.5 from 54 in April, in line with economists' forecasts.
The May reading was lower than the first estimate of 53.9 released late last month. The readings for April and May are higher than in the first two months of the first quarter and indicate that economic growth may pick up in the three months to June.
But with the French economy struggling to generate even modest growth, any pickup in the euro zone as a whole is unlikely to be strong enough to boost consumer prices and end a period of low inflation that stretches back to October.
The composite PMI for France fell to 49.3 from 50.6 in April, indicating that activity declined during the month. "France remains a major drag on the region's revival, where the survey data suggest the economy has stagnated in the second quarter," said Chris Williamson, chief economist at Markit.
"There is even the possibility of a renewed downturn in French GDP if business conditions continue to deteriorate in June."
The European Union's statistics agency Wednesday confirmed that the euro-zone economy grew by just 0.2% in the first quarter, a slowdown from the 0.3% rate of expansion recorded in the final three months of last year.
Eurostat's figures showed business investment slowed sharply during the quarter, growing by just 0.3% compared with 0.9% in the previous period. Household spending remained weak, while trade was a drag on growth, with imports rising more rapidly than exports.
That latter development may underpin concerns that ECB policy makers have expressed about the appreciation of the euro against other currencies since the middle of 2012, and its potentially detrimental impact on exports and inflation.
Indeed, without an increase in government spending, growth in the euro zone would have been even more meager. Eurostat said government spending rose 0.3% in the first three months of this year, having fallen by 0.4% in the final three months of 2013.
Most governments across the currency area are set to pursue less aggressive austerity programs during 2014 than they have in recent years, ending a significant drag on growth. The figures also showed that the economies of seven of the euro zone's 18 members contracted in the first quarter.
The annual rate of inflation in the euro zone fell to 0.5% in May from 0.7% in April. The surveys recorded another month in which businesses cut their prices, an indication that weak demand is still acting as a drag on inflation.
Eurostat provided more evidence of weak inflationary pressure, releasing figures Wednesday that showed prices at the euro zone's factory gates fell for the fourth straight month in April. producer prices were 1.2% lower than in the same month a year earlier.
In an effort to boost weak growth and too-low inflation, the ECB is widely expected to reduce interest rates on Thursday.
Because its deposit rate is already at zero, this would include the unusual move of installing a negative rate on overnight bank deposits--effectively charging banks to park funds at the ECB.
The ECB is also expected to commit itself to provide banks with unlimited credit well into 2016, signaling that it may be the last of the world's major central banks to raise official rates.
Additional ultracheap loans to banks, conditional on them lending more freely to businesses, are also seen likely.
However, some economists say the ECB will ultimately have to follow in the steps of the U.S. Federal Reserve and the Bank of England, and launch a program of bond purchases using freshly created money, which is known as quantitative easing.
"The bazooka of large-scale QE will also be needed if deflation risks are to be tackled head on," said Jonathon Loynes, chief European economist at Capital Economics.
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The results of a survey of 5,000 businesses across the euro zone comes a day ahead of a meeting of the European Central Bank's governing council, at which policy makers are expected to agree a series of measures designed to boost growth and the annual rate of inflation.
Data firm Markit said its composite Purchasing Managers Index for the euro zone--which measures activity across both the manufacturing and services sectors--fell to 53.5 from 54 in April, in line with economists' forecasts.
The May reading was lower than the first estimate of 53.9 released late last month. The readings for April and May are higher than in the first two months of the first quarter and indicate that economic growth may pick up in the three months to June.
But with the French economy struggling to generate even modest growth, any pickup in the euro zone as a whole is unlikely to be strong enough to boost consumer prices and end a period of low inflation that stretches back to October.
The composite PMI for France fell to 49.3 from 50.6 in April, indicating that activity declined during the month. "France remains a major drag on the region's revival, where the survey data suggest the economy has stagnated in the second quarter," said Chris Williamson, chief economist at Markit.
"There is even the possibility of a renewed downturn in French GDP if business conditions continue to deteriorate in June."
The European Union's statistics agency Wednesday confirmed that the euro-zone economy grew by just 0.2% in the first quarter, a slowdown from the 0.3% rate of expansion recorded in the final three months of last year.
Eurostat's figures showed business investment slowed sharply during the quarter, growing by just 0.3% compared with 0.9% in the previous period. Household spending remained weak, while trade was a drag on growth, with imports rising more rapidly than exports.
That latter development may underpin concerns that ECB policy makers have expressed about the appreciation of the euro against other currencies since the middle of 2012, and its potentially detrimental impact on exports and inflation.
Indeed, without an increase in government spending, growth in the euro zone would have been even more meager. Eurostat said government spending rose 0.3% in the first three months of this year, having fallen by 0.4% in the final three months of 2013.
Most governments across the currency area are set to pursue less aggressive austerity programs during 2014 than they have in recent years, ending a significant drag on growth. The figures also showed that the economies of seven of the euro zone's 18 members contracted in the first quarter.
The annual rate of inflation in the euro zone fell to 0.5% in May from 0.7% in April. The surveys recorded another month in which businesses cut their prices, an indication that weak demand is still acting as a drag on inflation.
Eurostat provided more evidence of weak inflationary pressure, releasing figures Wednesday that showed prices at the euro zone's factory gates fell for the fourth straight month in April. producer prices were 1.2% lower than in the same month a year earlier.
In an effort to boost weak growth and too-low inflation, the ECB is widely expected to reduce interest rates on Thursday.
Because its deposit rate is already at zero, this would include the unusual move of installing a negative rate on overnight bank deposits--effectively charging banks to park funds at the ECB.
The ECB is also expected to commit itself to provide banks with unlimited credit well into 2016, signaling that it may be the last of the world's major central banks to raise official rates.
Additional ultracheap loans to banks, conditional on them lending more freely to businesses, are also seen likely.
However, some economists say the ECB will ultimately have to follow in the steps of the U.S. Federal Reserve and the Bank of England, and launch a program of bond purchases using freshly created money, which is known as quantitative easing.
"The bazooka of large-scale QE will also be needed if deflation risks are to be tackled head on," said Jonathon Loynes, chief European economist at Capital Economics.
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