By Jonathan Cable
LONDON (Reuters) -Business activity across the euro zone unexpectedly accelerated this month as consumers splashed out on services, but weakening demand for manufactured goods deepened the downturn in the factory sector, surveys showed.
Friday’s data add to evidence the bloc will dodge a recession and indicates the 20-nation region’s economy is resilient in the near term at least, potentially giving the European Central Bank room to continue tightening policy.
The ECB will fulfil its 2% inflation mandate and monetary policy must be stubbornly tight to get the job done, Germany’s Bundesbank President Joachim Nagel said on Friday.
But sentiment remains frail as turmoil in the U.S. and European banking sectors in the past two weeks have revived memories of the 2008 global financial crisis.
Still, S&P Global’s flash Composite Purchasing Managers’ Index (PMI), seen as a good gauge of overall economic health, bounced to a 10-month high of 54.1 in March from February’s 52.0.
That was well above the 50 mark separating growth from contraction and above all forecasts in a Reuters poll which had predicted a dip to 51.9.
“The strong batch of euro zone flash PMIs for March means it is now all but certain that the economy expanded in Q1 while both employment conditions and price pressures remained very strong,” said Franziska Palmas at Capital Economics.
S&P Global said the survey was consistent with GDP growth of 0.3% in the first quarter and accelerating to an equivalent rate of 0.5% in March alone. A Reuters poll earlier in March predicted a 0.1% contraction in gross domestic product (GDP) this quarter.
Solid demand, at a 10-month high, meant firms were unable to complete all orders for the first time since June. The backlogs of work index rose to 50.1 from 49.5, just above breakeven.
Growth in Germany expanded for a second month, boosted by a revival in services that more than offset a manufacturing decline in Europe’s largest economy, a German PMI showed.
It was a similar story in France where business activity strengthened by more than forecast as the euro zone’s second-biggest economy benefited from growth in its dominant services sector.
In Britain, outside the euro zone, services companies reported a second month of growth in March, suggesting the overall economy expanded in early 2023, and businesses also turned more upbeat about their prospects in the year ahead.
Cash-strapped British households cut back on eating out and takeaways last month but buying food at supermarkets and shopping at discount stores gave an unexpected boost to retail sales, official data showed.
A PMI covering the euro zone’s dominant services industry jumped to 55.6 this month from 52.7, well above all forecasts in the Reuters poll which had predicted a decline to 52.5.
To cope with the increase in activity, firms took on additional staff at the fastest pace since May last year. The employment index bounced to 54.3 from 51.9.
However, it was a different picture for factories. The headline manufacturing PMI fell to 47.1 from February’s 48.5, confounding expectations in the Reuters poll for an uptick to 49.0.
An index measuring output, which feeds into the composite PMI, slipped back below breakeven to 49.9 from last month’s 50.1.
“The growth remains unbalanced, as manufacturing output and new orders fell, while services showed an unexpected uptick,” said Paolo Grignani at Oxford Economics.
Record improvements to supply chains meant the cost of raw materials fell for the first time since June 2020, when the COVID pandemic was cementing its grip on the world. The euro zone PMI input costs index slipped to 46.4 from 50.9.
That will likely be welcomed by policymakers at the ECB who increased interest rates last week, sticking with their fight against inflation despite recent turmoil in the banking sector.
“With the employment index still rising it is clear that price pressures remain high. That leaves us comfortable with our forecast for the ECB to hike by a further cumulative 100bps, taking the deposit rate to 4.00%,” Palmas said.
(Reporting by Jonathan Cable; editing by Susan Fenton and Mark Heinrich)