Euro-Area Services Grow in Sluggish Economic Recovery

Euro-area services output expanded at the strongest pace in almost three years last month, helping create jobs in a region suffering from low inflation, anemic growth and unemployment close to a record high.

A Purchasing Managers’ Index rose to 53.2 from 53.1 in April, Markit Economics said today, staying above the key 50 mark that indicates growth for a 10th month. In a sign of how fragile the economy remains, separate data showed consumer spending barely grew in the first quarter and net trade subtracted from growth.

“Although the euro zone is enjoying its best performance in three years, this is an uneven, stuttering and lackluster recovery,” said Chris Williamson, chief economist at Markit in London. While payrolls are rising , the pace of growth is “too low to generate enough job creation to bring unemployment down to any significant degree.”

The reports emphasize the challenges facing European Central Bank President Mario Draghi as he tries to rekindle the economy and prevent deflation. The ECB’s Governing Council meets in Frankfurt tomorrow, where it will probably lower its economic forecasts and add stimulus.

“The latest batch of data on the euro zone has maintained the strong pressure on the ECB to provide further policy stimulus,” said Jonathan Loynes, chief European economist at Capital Economics Ltd. in London. There is “absolutely nothing here to stop Mr. Draghi and colleagues.”

GDP Outlook

The gross domestic product data today showed euro-area growth slowed to 0.2 percent in the first quarter after the statistics office revised the last quarter of 2013 to show expansion of 0.3 percent. Consumer spending rose 0.1 percent, while net trade knocked 0.2 percentage point off GDP.

Markit’s services index for May was lower than an initial estimate and its combined measure of manufacturing and services declined to 53.5 from 54 in April. Markit said the surveys are consistent with economic growth of as much as 0.5 percent.

In the U.K., a services index came in at 58.6 in May, exceeding the 58.2 median estimate of economists. That compares with a reading of 58.7 in April and Markit said Britain’s economy “continued to boom” last month.

Bank of England policy makers begin their two-day meeting today amid improving data that raises the prospect of an increase in borrowing costs as soon as this year. They will leave the key rate at a record-low 0.5 percent tomorrow, according to a survey of economists.

French Drag

For the euro area, Germany “remains the key driver” and France is a “major drag,” Williamson said. A gauge of manufacturing and services activity in Europe’s largest economy eased to 55.6 in May, while French output contracted.

Companies hiring workers in Germany and Spain offset job cuts in Italy and France, leading to a second monthly increase in employment in the euro area. Even so, the jobless rate has hardly budged from a record 12 percent last year.

Raising pressure on the ECB to act, euro-area inflation slowed more than economists forecast in May, with the rate falling to 0.5 percent from 0.7 percent in April. Policy makers have said they’re considering all options within their mandate.

According to Bloomberg’s monthly survey, 90 percent of economists expect the central bank to lower rates. In addition to a cut in the benchmark rate, now at 0.25 percent, the majority see the ECB becoming the first major central bank to cut its deposit rate below zero. New liquidity operations to fuel lending to smaller companies and asset purchases are also among measures policy makers are debating.

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