Euro-Area Services Surge Aids Revival as Manufacturing Cools

The euro region maintained its uneven recovery this month as Germany helped drive a surge in services activity that offset a slowdown in manufacturing across the bloc.

Markit Economics said its Purchasing Managers Index of services activity in the region rose to the highest in almost three years, even as a factory gauge declined. A composite PMI was at 53.9, little changed from 54 in April and in line with the median estimate of economists in a Bloomberg survey. Markit said the region’s economic growth may accelerate to 0.5 percent this quarter, the fastest since early 2011.

European Central Bank President Mario Draghi will probably add stimulus to the 18-nation currency bloc next month as he tries to keep the revival on track. While the PMI surveys point to growth continuing, the upbeat assessment is largely due to Germany, the euro area’s biggest economy, as countries such as France and Italy struggle.

“We have to be a bit careful in drawing too-strong conclusions from this survey about the pace of the eurozone recovery,” said Martin van Vliet, senior economist at ING Groep NV in Amsterdam. “With inflation low and a sustained eurozone recovery not yet assured, further ECB easing in June looks all but certain.”

Weak Recovery

The euro was little changed at $1.3679 at 11:20 a.m. Frankfurt time.

Draghi said this month that policy makers are “dissatisfied” with the inflation outlook and “comfortable” with easing policy at their next rate-setting meeting on June 5. Markit’s composite report showed that prices charged by companies fell again in May, though a measure of new orders rose to 52.9 from 52.7 in April.

“A slight easing in the euro area’s rate of growth was seen in May but doesn’t change the picture of a region that’s enjoying its best spell of growth for three years,” said Chris Williamson, chief economist at Markit in London. “Deflationary pressures remain a major issue, however.”

Ninety percent of economists in the Bloomberg Monthly Survey said the ECB will ease policy in June, with potential measures ranging from a negative deposit rate to liquidity injections and asset purchases. The benchmark interest rate currently stands at a record low of 0.25 percent and the deposit rate is at zero.

The euro area eked out growth of just 0.2 percent last quarter. France unexpectedly stalled and economies from Italy to the Netherlands shrank. The region’s unemployment rate remains high, clocking in at 11.8 percent for March, just below last year’s record 12 percent.

The uneven nature of the recovery was further highlighted today, with Markit’s data showing that both manufacturing and services in France shrank this month. In Germany, a composite index of the industries held at 56.1, close to the highest level in three years.

“Of greatest concern is France, living up to its moniker of sick man of Europe, as Germany continues to enjoy robust growth and the rest of the region experiences its best expansion since mid-2007,” Williamson said.