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06/04/2006 | Eurozone: Buoyant Service Sector Adds to Increasing Optimism

Howard Archer

In March, Eurozone service-sector activity maintained its recent marked improvement to remain at its highest level since September 2000, according to the RBS/NTC Research purchasing managers’ survey. Specifically, the business activity index for the Eurozone services sector remained at 58.2 in March, having reached this level in February from 57.0 in January and 56.8 at the end of 2005.

 

Consequently, the business activity index averaged 57.8 in the first quarter of 2006, up markedly from the fourth-quarter 2005 average of 55.6. A reading above 50.0 indicates expanding activity, while below that indicates contraction.

Encouragingly, all of the individual Eurozone countries saw robust service-sector growth in March. Indeed, the French business activity index reached its highest level since December 2000, at 60.4. In addition, the Italian business activity index jumped to 59.0, up from 57.7 in February and just 48.5 in August 2005. The Spanish business activity index also saw major improvement in March, managing a 20-month high of 56.2. Meanwhile, service-sector activity remained very healthy in Ireland, where the business activity index jumped to 63.1 in March—its highest level since November 2000.

Germany was the only country to see a retreat in its business activity index during March. Even so, activity was still relatively buoyant and well above 2005 levels. Specifically, the index softened to 56.6 in March, from 57.8 in February and 58.1 in January (its highest level since May 2000). It had been below 50.0 between April and August 2005.

Boding well for future activity, incoming new business across the Eurozone was at its strongest level since January 2004 in March, with the index for this climbing to 56.8, from 56.4 in February and 55.2 at the end of 2005. Again, all of the individual countries saw robust demand, with orders reaching long-term highs in Ireland (64 months), Italy (28 months), Spain (21 months), and France (10 months). In addition, although German orders growth softened modestly in March, the first-quarter average for the incoming new business index was the highest since the second quarter of 2000. Meanwhile, outstanding service-sector business across the Eurozone rose for a seventh successive month in March.

Reflecting the recent overall improvement in activity and new orders, business expectations among Eurozone service-sector companies remained relatively high in March, although the index for this actually softened to 65.9, from 66.9 in February and January's two-year high of 69.9. This was largely due to a moderation in business expectations in Germany and France (which may have been influenced by the major unrest over proposed labour market reform). In contrast, business optimism rose sharply in Italy and Spain.

Encouragingly, service-sector employment growth across the Eurozone expanded at its fastest rate since March 2001. Specifically, the employment index climbed to 54.1 in March, from 53.1 in February and 52.6 in January. This was up from 50.3 in June 2005. Services employment grew in each country, reaching its highest level since December 2000 in Germany and holding at a 63-month high in Ireland. It also strengthened to a 55-month high in Italy and picked up markedly in Spain. Employment growth was also robust in France, although its pace was just below the four-year peak seen at the end of 2005. Even though many service-sector firms in the region remain focused on keeping their labour forces as tight as possible to contain costs amid still-squeezed margins and strong competition, it appears that the sustained, recent improvement in activity and new business means that a growing number of firms are now having to take on more staff.

Indeed, service-sector companies' margins remained under severe pressure in March, although the pressure did at least ease further compared with the end of 2005. The input prices index moderated to a nine-month low of 58.1 in March, from a peak of 60.3 in December. Even so, it was still very high, primarily because of elevated energy prices. Meanwhile, the prices-charged index rose to 52.4 in March, the highest level since April 2002 and up from 50.8 at the end of 2005. This indicates that Eurozone firms' pricing power has increased in recent months, although the index still points to relatively moderate price gains.

The purchasing managers' service-sector survey for March adds to the recent compelling evidence that the Eurozone's overall economic upturn since mid-2005 has regained significant momentum following the fourth-quarter dip in GDP growth. In addition to the very strong services survey, the European Commission reported that overall economic sentiment in the Eurozone climbed to its highest level in March since mid-2001, while the purchasing managers' survey for the Eurozone manufacturing sector indicated that activity was at its strongest since September 2000.

Even allowing for the fact that survey evidence has been markedly stronger than the hard economic data recently, this is very encouraging. Robust incoming new business points to healthy service-sector growth in the near term at least, while it is particularly encouraging to see that services employment expanded at its fastest rate for five years in March. With the manufacturing PMI also showing rising payrolls in March, this boosts hopes that labour markets across the region are finally starting to show the improvement that is critical for consumer spending to make a sustainable and major contribution to overall growth.

Meanwhile, the European Central Bank (ECB) will see the advance in the prices-charged index to a near four-year high in March as evidence that high energy prices are increasingly filtering through the supply chain and posing more of a threat to medium-term price stability. This will reinforce the ECB's inclination to lift its key interest rate by a further 25 basis points, to 2.75%, in May, particularly because it will feel that further evidence of robust economic activity justifies a less accommodative monetary policy stance. Indeed, the ECB seems highly likely to raise its key interest rate to 3.0% in the third quarter.

Offnews.info (Argentina)

 



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