Euro Economy Shows Unexpected Strength After ECB Action: Economy

Euro-area manufacturing and services activity strengthened in a sign of confidence that further stimulus by the European Central Bank will consolidate a fledgling economic recovery.

A Purchasing Managers Index for both industries jumped to 54 in July from 52.8 in June, matching a three-year high reached in April, London-based Markit Economics said today. That’s the 13th month the gauge has exceeded 50, the mark that signals expansion. Economists predicted an unchanged reading of 52.8, according to the median of 22 estimates in a Bloomberg News survey.

The pickup comes after policy makers introduced a negative deposit rate and targeted loans to bolster lending, growth and an inflation rate running at a quarter of the ECB’s goal. While risks to the economic outlook have increased with escalating tensions in the Middle East and Ukraine, strengthening manufacturing in China bodes well for export demand.

While “the recovery has some underlying momentum,” there is “no reason to become overly optimistic,” said Peter Vanden Houte, chief euro-area economist at ING Groep NV in Brussels. “Monetary policy will have to remain extremely accommodative for a long time to come to make sure that the economic recovery can withstand the looming headwinds.”

They may include intensifying tensions in Israel and new sanctions proposed against Russia after a Malaysian jet was shot down over rebel-held territory in eastern Ukraine, as well as a looming banking crisis in Portugal and a disappointing economic performance in France, the euro area’s second largest economy.

Good News

For now though, today’s data provide “some much-needed and welcome good news,” said Howard Archer, chief European economist at IHS Global Insight in London. “Overall growth in euro-zone manufacturing and services output improved appreciably,” lifting “hopes that the euro-zone economy can gradually gain traction over the second half of the year after a disappointing and lackluster first half,” he said.

A manufacturing index rose to 51.9 in July from 51.8 in June, while the gauge for services jumped to 54.4 from 52.8, Markit said.

The euro rose 0.1 percent today and traded at $1.3474 at 12:09 p.m. Frankfurt time. The Stoxx Europe 600 Index is up 0.3 percent at 343.94.

New Orders

Euro-area manufacturers reported further growth of production, new orders and new exports, according to today’s report. Yet, performance across the 18-nation region diverges.

Factory activity strengthened in Germany and contracted at the fastest pace this year in France. A measure for services signaled expansion at the fastest pace in three year in Europe’s largest economy, and the first month of growth since April in its neighboring country.

While France’s economy “is stagnating at best,” Germany’s “is growing at a robust 0.7 to 0.8 percent pace at the start of the third quarter,” said Chris Williamson, chief economist at Markit, who predicts the euro-area economy grew 0.4 percent in the second quarter, following a 0.2 percent expansion in the three months through March.

“Business activity picked up again in July to suggest that the economy is growing at one of the strongest rates we have seen in the past three years,” he said. At the same time, “growth is not fast enough to encourage firms to take on staff in sufficiently large numbers to have a meaningful impact on unemployment.”

Joblessness held at 11.6 percent in May, close to a record high. The ECB predicts the rate will drop to an average of 11 percent in 2016, while it sees growth accelerating to 1.8 percent from 1 percent this year.

Chinese Growth

A boost may come from exports fueled by a recovery in China. The economy expanded 7.5 percent in the second quarter from a year earlier, matching a government’s target for growth in all of 2014, and a manufacturing gauge rose to an 18-month high in July.

Bayerische Motoren Werke AG, the German luxury car and motorcycle maker, said last week it plans to double its China-produced models to six and boost manufacturing capacity in the country to 400,000 vehicles a year from 300,000.

“Today’s data make us confident that growth of the euro zone economy will turn a bit stronger in summer,” said Christoph Weil, senior economist at Commerzbank AG in Frankfurt. “The likely stabilization of the global economy looks set to be one reason for this slight recovery.”

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