August 22, 2013 11:00 am

Eurozone PMIs show economy gaining traction

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The eurozone’s recovery has eked out further gains in August although weakness in France pointed to the uneven nature of the rebound, a leading business survey showed on Thursday.

The composite Markit Purchasing Managers’ Index, combining both manufacturing and services sectors, rose to 51.7 in a “flash” or preliminary reading for August from 50.5 in July – its highest level in two years. Any reading above 50 indicates overall growth. New orders in manufacturing across the bloc and Germany in particular drove the expansion.

“The third quarter is shaping up to be the best that the euro area has seen in terms of business growth since the spring of 2011,” said Chris Williamson, Markit chief economist. “The economic picture from the surveys is therefore coming in line with policy makers’ expectations of a modest yet still fragile return to growth.”

The fragility was underlined by the data group’s survey of France which showed private sector output falling at a faster rate. The flash France composite output index fell to 47.9 in August from 49.1 in July, putting output more firmly in contractionary territory.

With unemployment still near record levels, austerity measures curtailing government spending and bank lending to companies falling, the euro area is dependent on exports to drive much of its recovery, making the turmoil in emerging markets worrying. However, a rise in the HSBC flash China manufacturing PMI to 50.1 in August from 47.7 in July provided some cause for optimism.

“Exports to China dwarf those to the worst-hit countries of the latest turbulence,” Christian Schulz, economist at Berenberg, said in a note. “China received more than 6 per cent of Germany’s exports last year, six times as much as India and 20 times as much as Indonesia.”

Markit’s US flash PMI data showed that manufacturers in the world’s largest economy continue to expand, with the index nudging up to 53.9 in August from 53.7. The data are relatively new and untested though, so investors tend to pay more attention to the ISM manufacturing index that is released later in the month.

The eurozone data are likely to lower any pressure on the European Central Bank to consider an interest-rate cut or a more explicit version of the “forward guidance” pledging not to raise rates for an extended period of time, as long as inflationary pressures remain subdued.

The German economy remained buoyant with the composite output index there rising to 53.4 in August from 52.1 in July. Both manufacturing and services improved, with the former leading in terms of output and new business growth.

The benign conditions in Germany and signs of gradual improvement elsewhere in the euro area will be welcomed by German chancellor Angela Merkel, leading her party into a general election on September 22.

The acknowledgment by her finance minister, Wolfgang Schäuble, this week that Greece would need a third bailout has put the eurozone economy back on front pages as the election campaign enters a higher gear, but German voters have not felt the debt crisis at home.

Despite the setback in the latest survey of France, Markit noted that the rate of decline had slowed since earlier in the year and, for the first time in two years, the eurozone’s second-biggest economy had recorded a slight rise in new manufacturing orders.

Official gross domestic product data last week showed that the eurozone had emerged from an 18-month recession in the second quarter of the year, bolstering optimism for a gradual, if subdued recovery. However, economic output for the 17-nation bloc is still 3 per cent smaller than at the start of 2008.

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