Europe's Services, Manufacturing Growth Accelerates

Growth in Europe’s services and manufacturing industries unexpectedly accelerated in July as concern over the sovereign-debt crisis eased and an increase in global trade spurred exports.

A composite index based on a survey of euro-area purchasing managers in both industries rose to 56.7 from 56 in June, London-based Markit Economics said today. Economists had projected a drop to 55.5, the median of 18 estimates in a Bloomberg survey showed. European stocks advanced and the euro rose against the dollar.

With global trade recovering, Daimler AG, the second- largest luxury-car maker, raised its full-year profit forecast this month and Renault SA said first-half car sales jumped 22 percent. As concerns over the fiscal crisis ease amid a drop in risk premiums on southern European debt, the region’s next test is the publication tomorrow of bank stress tests.

“It was surprisingly robust,” said Klaus Baader, chief euro-region economist at Societe Generale in London. “It looks as if the second half won’t show as much cooling as expected.”

Other data also pointed to a stronger-than-expected recovery. Euro-area consumer confidence improved more than projected this month and industrial orders rose 3.8 percent in May instead of the contraction economists had predicted, while French business confidence increased more than forecast this month, data showed today.

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Photographer: Michele Tantussi/Bloomberg

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European Stocks

European stocks gained for a third day as the economic reports assuaged concerns that the recovery may be faltering. The Stoxx Europe 600 Index advanced 1.9 percent to 253.92 at 3:26 p.m. in London, rebounding from an earlier drop of 0.4 percent. The euro rose 1.3 percent against the dollar to $1.2919.

An index of euro-area services, which account for about 60 percent of the region’s gross domestic product, rose to 56 in July from 55.5 in the prior month, Markit said. A gauge of euro- area manufacturing rose to 56.5 from 55.6 in June.

The extra yields investors demand to hold debt from Spain and Portugal has eased from euro-era highs seen in May and June when concerns about a Greek default caused contagion around the southern euro region. European leaders in May pledged an unprecedented 750 billion-euro ($966 billion) financial backstop for countries struggling to raise funds, and sought deeper budget cuts in return.

Next Hurdle

The next hurdle for the region is the publication of stress tests on banks tomorrow. European regulators are testing 91 banks to examine whether they can withstand a shrinking economy and a drop in government-bond values. Governments are counting on the tests on firms including Madrid-based Banco Santander SA and Frankfurt-based Deutsche Bank AG to reassure investors about the strength of the financial system and the amount of state support lenders may need.

The risk premium on Spanish debt traded at 174 basis points today, compared with a euro-era closing record of 221 basis points on June 16.

Today’s data may also show a divergence between economic performance in Germany and in the so-called peripheral euro region, said Ralph Solveen, head of economic research at Commerzbank AG in Frankfurt. Germany’s services index surged to 57.3 from 54.8 in June.

The euro-area “increases are exclusively attributable to a steep rise in Germany,” Solveen said in a note to clients. “These numbers highlight the current split in economic activity within the euro zone.”

High-Deficit Countries

That will be accentuated as high-deficit countries including Greece and Spain implemented deeper budget cuts, Societe Generale’s Baader said. Spain increased the value-added tax in July, a month after cutting public workers’ wages an average 5 percent and announcing a freeze on pensions.

That may make countries like Spain more dependent on exports. The value of world trade surged 25 percent from a year earlier in the first quarter, according to the World Trade Organization, underpinning the recovery as domestic demand remains weak.

Still, exporters may struggle to shore up earnings over the coming months as the global recovery shows signs of weakening and the euro rebounds from a four-year low reached last month. China’s economic expansion slowed in the second quarter and industrial production cooled more than economists forecast in June. In the U.S., the world’s largest economy, confidence among consumers dropped in July to the lowest level in a year.

“The U.S. is, I think, in the early stages of what is a very protracted sluggishness of domestic internal demand,” said Stephen Roach, Morgan Stanley’s non-executive chairman for Asia, in a radio interview with Tom Keene and Ken Prewitt on July 19. “The dynamism that we’ve gotten hooked and accustomed to is just not going to be” there.

To contact the reporters on this story: Emma Ross-Thomas in Madrid at erossthomas@bloomberg.net; Simone Meier in Zurich at smeier@bloombert.net.

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