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News : EU Economy Last Updated: Sep 4, 2013 - 12:11 PM

Eurozone services returned to growth in August; French activity shrunk
By Finfacts Team
Sep 4, 2013 - 9:21 AM

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Eurozone services returned to growth in August and the final Markit Eurozone PMI (purchasing managers' index) Composite Output Index signalled a second successive monthly expansion in business activity in August. French activity shrunk.

The index rose to 51.5, up from 50.5 in July, to signal the fastest rate of growth in just over two years. The final reading was slightly below the flash estimate of 51.7.

Manufacturing led the upturn in August, seeing production volumes expand to the greatest degree since May 2011. Meanwhile, the service sector moved back into growth territory for the first time in just over one-and-a-half years.

The main factor underpinning the faster expansion of output in August was a return to growth for new order inflows. New business rose for the first time since July 2011, as manufacturing new order growth hit a 27-month record and demand at service providers stabilised.

The early stages of the recovery have yet to filter through to the eurozone labour market, however, as job losses were reported for the twentieth consecutive month. There were signs that capacity was moving more in line with current demand requirements though, as backlogs of work were broadly unchanged over the month.

On the price front, average input costs rose at the fastest pace since January, mainly due to higher oil and fuel prices. Cost inflation remained solid at service providers, while the rate of decline in manufacturers’ input prices eased significantly over the month. Average selling prices continued to fall, but the rate of decrease eased to a 15-month low.

Of the big-four Eurozone economies, Germany registered the strongest performance during August. Output growth in Germany hit a seven month high, reflecting faster expansions at both manufacturers and service providers. This failed to create jobs, however, as employment fell for the third time in the past four months. The recovery in Ireland also gathered pace, with output growth hitting a near six-and-a-half year high.

Italy and Spain both moved out of contraction territory in August, halting periods of decline that began in May 2011. Both improvements were led by manufacturers, although Spanish service providers also reported a modest increase in business activity (in contrast to their Italian peers). Both nations continued to report job losses, however.

In contrast, France registered a faster drop in overall output than in July. The downturn in the service sector moderated slightly, but manufacturing dipped back into contraction.

Services: At 50.7 in August, up from 49.8 in July, the Services Business Activity Index indicated a return to growth for the eurozone service sector.

This halted a one-and-a-half year sequence of contraction. However, the final index reading was slightly below the earlier flash estimate of 51.0.

Underpinning the increase in output were a stabilisation in new business inflows (following a 23-month period of decline) and a slight reduction in backlogs of work.

Ireland recorded by far the steepest rate of expansion in business activity of all the nations covered by the survey, with growth hitting a six and-a-half year high. Germany saw output rise for the third month running, and at the fastest pace since February. Business activity returned to growth in Spain, and moved closer to stabilising in France and Italy.

Business optimism continued to improve, reaching a 17-month high in August. Companies linked their improved outlook for business activity to the recent stabilisation in new order inflows. Confidence strengthened in France and Germany, but weakened in Ireland, Italy and Spain.

Average cost inflation accelerated to a six-month high in August, reflecting higher prices for fuel, oil and associated costs. In contrast, average service charges fell for the twenty-first straight month. Of the five Eurozone members surveyed, only Germany reported an increase in charges since July. The sharpest fall in charges was signalled in Spain.

Service sector employment fell for the twentieth month in a row during August, with job losses reported in France, Italy and Spain. Cuts to payroll numbers in these nations offset a solid gain in staffing at Irish service providers and a further marginal increase in Germany.

Chris Williamson, chief economist at Markit said: “The eurozone recovery is looking increasingly broad-based, with more sectors and more countries emerging from recession.

“Service sector companies reported the first increase in business activity for a year-and-a-half in August, which follows news from the manufacturing PMI that goods production is now growing at the fastest pace for over two years. Encouragingly, domestic demand is starting to pick up within the euro area, with the region’s retail PMI also moving into positive territory for the first time in over two years in August.

“Spain and Italy have now also joined Germany in returning to growth, and France is seeing a far weaker rate of decline than earlier in the year.

“Although the picture is improving, the survey is still consistent with only very modest economic growth of approximately 0.2% in the third quarter.

“While policymakers will therefore be pleased to see this growing body of evidence that the euro area recovery is now taking hold, the weakness of growth and ongoing job losses suggest the ECB’s principal focus will be on reassuring markets that rates will not rise for the foreseeable future.”

The Eurozone Composite PMI (purchasing managers' index) ) is produced by Markit and is based on original survey data collected from a representative panel of around 5,000 manufacturing and services firms. National manufacturing data are included for Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece. National services data are included for Germany, France, Italy, Spain and the Republic of Ireland.

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