Euro Economy Picks Up With Business Index at Four-Year High

Updated on

An index of euro-area factory and services unexpectedly rose to the highest in more than four years this month as growth gained momentum in Germany and France, the bloc’s two largest economies.

Markit Economics said on Tuesday that its composite index increased to 54.1 from 53.6 in May. That’s above the 50 mark that divides expansion from contraction and exceeds the median estimate of economists, who forecast it would slip to 53.5. France’s gauge of the two industries climbed to the highest since 2011 and growth in Germany also strengthened.

The euro-zone economy is weathering the Greek debt standoff “relatively well,” said Chris Williamson, chief economist at Markit. European Central Bank stimulus and a weaker euro helped boost euro-area growth to 0.4 percent in the first quarter, and Markit says its purchasing-manager indexes suggest the region grew at a similar pace between April and June.

“The second quarter upturn signalled by the PMI puts the region on course to expand by around 2 percent this year, though much of course depends on the outcome of the Greek debt negotiations,” Williamson said.

The euro fell against the dollar and was trading at $1.1214 as of 12:25 p.m. London time, down 1.1 percent on the day, amid speculation monetary policies in the U.S. and Europe will keep diverging. Goldman Sachs Group Inc. said on Monday that the European Central Bank’s quantitative-easing program will send the currency toward parity with the greenback.

Recent Escalation

While the recent escalation of the Greek crisis appears to have taken some of the steam out of hiring growth, Williamson said, employment over the second quarter as a whole posted the largest rise for four years.

After a day of marathon talks on Monday, European leaders gave Greek Prime Minister Alexis Tsipras’s government 48 hours to make a final effort to satisfy creditors and end a five-month standoff. Leaders from Greece’s 18 fellow euro-zone countries agreed to step up the pace of negotiations to secure a breakthrough on Wednesday that leaders can sign off at the end of the week.

While Markit’s euro-area reports “suggest that second-quarter gross domestic product growth will turn out as well as in first quarter, the future is less certain,” said Teunis Brosens, an economist at ING Bank NV in Amsterdam. “The Greek crisis is increasingly cited as a source of uncertainty by surveyed companies. A deal between Greece and its creditors this week may be just in time.”

Temporary Drags

Euro-area growth was affected by temporary drags during the first half, including a softening in global growth and a rebound in energy prices, according to Greg Fuzesi, an economist at JPMorgan Chase & Co.

“These temporary drags are expected to fade, while the support from the weaker currency is still building,” Fuzesi said. “Hence, unless the Greek crisis intensifies significantly, we would still expect these factors to push euro area growth higher.”

Markit’s composite euro-area index of both manufacturing and services rose to the highest since May 2011, it said. A gauge measuring factory activity rose to 52.5 from 52.2 in May, while the gauge of services increased to 54.4 from 53.8.

Markit’s French composite index rose to 53.4 from 52, the strongest reading since August 2011, as both manufacturing and services strengthened. There was a similar picture in Germany, the region’s largest economy, where the composite gauge advanced to 54 from 52.6.

A seperate gauge of Chinese manufacturing showed signs the industry is stabilizing after policy makers eased monetary settings and bolstered provincial finances. The preliminary Purchasing Managers’ Index from HSBC Holdings Plc and Markit Economics was at 49.6 for June, beating the median estimate of 49.4 in a Bloomberg survey and up from 49.2 last month.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE