Services sector growing more optimistic

European service-sector companies are even more optimistic about prospects for sales, profits, employment and investment than a year ago, according to a closely watched business survey from NTC Economics.

The build-up in economic momentum across Europe is reflected in companies’ expectation that staff costs will accelerate, with fewer than one in 10 surveyed expecting slower inflation in wages.

To pay for this, many are expecting to raise prices in the next 12 months.

The combination of optimism about business prospects and signs of rising cost and price inflation will put further pressure on the European Central Bank and the Bank of England to continue raising their interest rates.

Luke Thompson, senior economist at NTC, said: “With year-on-year growth of the sector in 2006 the highest for five years, the outlook for services expansion for 2007 is clearly very positive.”

Initially largely export-led, the economic turnround in continental Europe has broadened recently into a more self-sustaining recovery.

The ECB is almost certain to raise interest rates to 4 per cent next month, while the Bank of England’s inflation forecasts last week showed that another interest rate rise would be needed if it is to have a 50:50 chance of hitting its 2 per cent inflation target in the medium term.

The ECB sees significant scope for boosting long-term economic growth prospects, especially by pushing for a single European market.

Jean-Claude Trichet, ECB president, said in an interview with the Financial Times last week: “The single market is a structural reform of the first importance ... You know that the main problem there is certainly services-sector integration, achieving the single market in the services sector.”

Both the eurozone and UK central banks pay close attention to the monthly pan-European purchasing managers’ indices, published by the consultancy NTC Economics.

NTC’s twice-yearly business outlook survey of the same 2,800 service-sector companies provides a picture of how they are planning for the future.

Optimism is highest at Irish, Italian and UK service-sector companies, although the big improvement in sentiment has come in France and Germany.

While 33 per cent more French companies were optimistic than pessimistic in April 2006, the positive balance rose to 44 per cent this year.

Post, telecoms and financial companies expressed the most confidence that their businesses would expand over the next 12 months. UK, Italian and Irish companies were most confident about boosting their profitability.

One result that is likely to confirm fears of rising inflationary pressure is that many more companies were concerned about the rising costs of labour and materials.

Across the EU, over six in 10 companies thought the annual rate of growth of staff costs would be higher in the next 12 months than the current rate. Among those companies that engaged in outsourcing, many more expected the inflation rate of these services to rise than expected it to fall.

With such pressure from costs and an expectation that profits are going to rise, 37 per cent of service companies expected the rate of their annual price increases to be higher, with only 10 per cent expecting the rate of inflation of prices charged to fall.

Mr Thompson stressed that with companies expecting to increase employment and believing a tight labour market would drive wages higher, the onus would be on the ECB to react. “It’s good news for employees and in turn consumers, but bad news for the ECB and inflation.”

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