Euro-Area Growth Faces Upside Risk as Weak Prices Restrain ECB

  • Purchasing Managers’ Index remains at 56.8; est. 56.7
  • Gauge for manufacturing rises as services activity slowed

The euro-area economy is growing at a pace that would warrant a tightening of monetary policy if it wasn’t for weakening inflation, IHS Markit said.

A Purchasing Managers’ Index remained at 56.8 in May as manufacturing expanded at the fastest pace in more than six years and a gauge for services slipped, the London-based company said on Tuesday. Economists in a Bloomberg survey had predicted a marginal decline to 56.7.

The European Central Bank is looking for data confirming that the region’s recovery is solid and broad-based as it prepares to debate how to exit its unconventional stimulus policies. While the report suggests the upswing is set to continue, input costs point to a weakening in underlying inflation in the second half.

“The PMI data indicate that euro-zone growth remained impressively strong in May,” said Chris Williamson, chief business economist at IHS Markit, adding that a consensus forecast for a 0.4 percent increase in gross domestic product in the second quarter may prove to be too pessimistic. While the pace of expansion signaled “is historically consistent with the ECB taking a hawkish stance, the dip in cost pressures will add weight to arguments that there’s no rush to taper policy.”

An index for manufacturing rose to 57 from 56.7, according to IHS Markit, while a measure for services eased to 56.2 from 56.4. Data earlier on Tuesday showed that economic activity accelerated both in France and Germany.

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