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News : EU Economy Last Updated: Jul 6, 2011 - 9:09 AM

Eurozone services recovery slowed further in June
By Finfacts Team
Jul 5, 2011 - 9:11 AM

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Source: Markit - - below 50 represents a contraction in activity.

The Eurozone services recovery slowed further in June and the final Markit Eurozone Services Business Activity Index fell to an eight-month low of 53.7 in June, down from 56.0 in May and below the earlier flash estimate of 54.2. The index has signalled a slowdown in the sector since hitting a three-and-a-half year high in March. Growth of new business also slowed, hitting a seven-month low.

The PMI (Purchasing Managers' Index) data for Q2 2011 are consistent with a less robust contribution to Eurozone GDP from the service sector than during the opening quarter. The average Business Activity Index reading has fallen from 56.6 in Q1 to 55.5 in Q2

The ongoing recovery, which extended into its twenty-second month, remained uneven by nation in June. Growth of services activity was led by robust expansions in Germany and France. The former saw a slight acceleration in the rate of increase, whereas the latter saw a marked growth slowdown to a six-month low. Similar trends were also seen in these nations for new business.

The performances seen outside of the big-two economies, however, were comparatively subdued.

Italy fell back into contraction for the first time in five months, following the steepest drop in new business for almost two years. Spain registered a marginal increase in activity, as levels of new work rose for the first time since last July. Ireland saw only a modest expansion of activity (albeit the fastest since February) and new orders decline for the second month running.

Jobs growth firmly centred on Germany

Jobs growth was recorded in the service sector for the fourteenth consecutive month in June. However, the rate at which companies added to their payrolls was the weakest since January (and below the earlier flash estimate).

Employment growth partly reflected the need to expand capacity to meet demand. This was highlighted by the only nations to report jobs growth – Germany and France – also being those to see the strongest inflows of new business and rising backlogs of work.

Germany saw the sharpest rise in employment, one that was among the most robust over the survey history. Jobs growth in France was, however, only slight and the weakest over the current 14-month period of increase. Spain and Ireland reported further cuts, with the pace of reduction accelerating in the former, while Italy saw a modest decline for the first time in three months.

Business optimism lowest for nearly two years

June saw optimism regarding levels of business activity in one year’s time slip to its lowest since July 2009. Service providers commented that they anticipate new business to increase further over the coming year, but are concerned over the strength of the global economic recovery.

Business confidence declined in Germany, France, Italy and Ireland, but improved slightly in Spain. However, only in Germany was the degree of optimism above its long-run average.

Differentials in national selling price trends remain driven by domestic market strength

Markit said average prices charged for services rose for the fifth month running in June, with the rate of increase slightly sharper than that signalled in May. National trends in selling prices were closely related to relative demand strength, as the countries reporting the fastest charge inflation (France and Germany) were also those to see the strongest inflows of new business. Italy saw a modest increase, whereas Ireland and Spain reported marked and accelerated reductions in average selling prices.

Input costs faced by Eurozone service providers rose markedly. The rate of input price inflation was the slowest in five months, but still slightly above the long-run average. Firms mentioned fuel and energy in particular as having risen in cost.

Input cost inflation was highest in Germany and France, accelerating in the former but easing to a six-month low in the latter. Italy and Spain also reported solid increases. Ireland only saw a modest rise in costs, with the pace of increase the lowest in the year-to-date.

Chris Williamson, Chief Economist at Markit said: "Growth of Eurozone private sector services activity was the weakest since last October, the rate of growth having slowed in June to the greatest extent since February 2009.

"Domestic demand continued to stymie services growth across the region’s peripheral countries, reflecting a combination of economic uncertainty and deficit-reducing austerity measures. However, Italy has emerged as the country that appears to be showing the greatest loss of momentum as economic, political and financial concerns mounted during the month.

"Although growth slowed sharply in France, the pace has merely eased from a rapid rate earlier in the year, meaning France and Germany remain the key drivers of service sector growth in the euro area. But with manufacturing growth having slowed sharply in both of these countries in June, the concern is that services activity could also trend downwards in coming months."

The Eurozone Services PMI (Purchasing Managers' Index) is produced by Markit and is based on original survey data collected from a representative panel of around 2000 private service sector firms. National data are included for Germany, France, Italy, Spain and the Republic of Ireland. These countries together account for an estimated 80% of Eurozone private sector services output.

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