Europe’s Strengthening Recovery May Stay Draghi’s Hand

Euro-area services growth accelerated more than forecast in February, underlining a strengthening recovery that takes pressure off the European Central Bank to add stimulus when policy makers meet tomorrow.

A services index rose to a 32-month high of 52.6, exceeding the provisional reading of 51.7, Markit Economics said today. A separate report showed exports increased 1.2 percent in the fourth quarter, helping gross domestic product rise 0.3 percent. In the U.K., services grew more than economists forecast.

ECB President Mario Draghi held out the prospect of further policy easing on Feb. 6, saying the Frankfurt-based central bank needed “to get more information” on the recovery before making any decision. Since then, data on inflation and economic sentiment exceeded estimates, and only a quarter of forecasters in a Bloomberg News survey say the ECB will reduce the benchmark rate from the current record-low 0.25 percent.

“It should give them confidence that the recovery, albeit modest, is still ongoing,” said Nick Matthews, senior European economist at Nomura International Plc in London. “What it will mean is that there are no revisions to the ECB’s forecasts when it publishes the staff projections.”

The improvement in the euro-area services index was led by Germany. The gauge in Europe’s biggest economy jumped to 55.9 in February, a 32-month high, from 53.1 in January. That exceeded the flash estimate of 55.4. The French gauge dropped less than initially estimated.

Trade Boost

Spain’s government bonds rose today, pushing 10-year yields to the lowest level since January 2006, as HSBC Holdings Plc recommended investors buy the debt at an auction tomorrow. Spain’s 10-year yield fell five basis points, or 0.05 percentage point, to 3.39 percent at 11:37 a.m. London time, the least since Jan. 24, 2006. The euro fell 0.2 percent to $1.3716.

The GDP report from Eurostat in Luxembourg showed that imports increased 0.4 percent in the fourth quarter and household consumption rose 0.1 percent. Net trade added 0.4 percentage points to GDP. The 0.3 percent economic growth matched an initial estimate published last month.

The euro area will record annual growth in 2014 for the first time in three years, according to forecasts by the International Monetary Fund and the ECB, though high unemployment and weak price pressures remain risks. With inflation less than half the 2 percent level the ECB defines as price stability, Draghi has said he stands “ready to act” to provide more support.

‘Touch and Go’

While IMF Managing Director Christine Lagarde said yesterday in Bilbao, Spain, that broad-based deflation “is not in the cards” for the euro area, it remains a risk, she said.

The central bank announces its policy decision tomorrow, along with new projections prepared by staff. It currently forecasts growth of 1.1 percent for this year.

“The improvement in services activity may slightly ease pressure for further ECB stimulative action,” said Howard Archer, an economist at IHS Global Insight in London. “But it still looks touch and go whether they will act.”

French GDP climbed 0.3 percent in the fourth quarter, while growth in Germany accelerated to 0.4 percent from 0.3 percent in the third. Separately, retail sales increased 1.6 percent in January, more than economists had forecast.

In the U.K., Markit’s index slipped to 58.2 from 58.3. That’s above economists’ forecast for a decline to 58, and Markit said its industry surveys point to first-quarter GDP growth of about 0.7 percent.

Slow Momentum

The euro-area economy will expand 0.3 percent each in the first two quarters of this year, according to Bloomberg’s monthly survey of economists.

ECB Governing Council member Gaston Reinesch told Germany’s Boersen-Zeitung in an interview published last week that “hard data” suggested that the euro region’s economic recovery seemed “to be gaining momentum slowly,” even though it is “still moderate and vulnerable.”

Manufacturing output slowed in February, even as economic confidence unexpectedly rose and German business sentiment reached the highest level in 2 1/2 years.

Europe’s recovery has yet to reach companies. While Bayerische Motoren Werke AG, Volkswagen AG’s Audi unit and Daimler AG’s Mercedes-Benz brand are all targeting at least a fourth consecutive year of record deliveries in 2014, they’re banking on sales growth abroad to help make up for a stagnant market in their home region.

“There will not be a fast recovery in Europe,” Daimler Chief Executive Officer Dieter Zetsche said yesterday. Even so, there are “positive signals even from southern Europe,” he said.

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