LONDON: Price cuts by eurozone firms failed to prevent business growth from losing momentum in May, all but sealing the case for looser monetary policy a day before the European Central Bank meets.
Markit’s Composite Purchasing Managers’ Index (PMI) showed that while output across the bloc remained solid in May the pace of growth eased — despite output prices falling for the 26th straight month.
“Today’s PMIs remain consistent with some recovery in the eurozone,” said Annalisa Piazza at Newedge Strategy. “That said, we rule out that the picture of moderate recovery will be an obstacle for the ECB to justify further accommodation this week.”
ECB policymakers have flagged a move at today’s meeting.
Sources said last month the bank was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small and mid-sized businesses. Annual eurozone inflation, which the ECB prefers to be just under 2 percent, fell unexpectedly in May to just 0.5 percent, increasing the risks of deflation and making a policy response today a virtual certainty.
Industrial producer prices, a proxy for consumer prices, fell as expected both on the month and on a year ago in April, Eurostat also said yesterday.
In Britain, which does not use the euro, the services industry expanded faster than expected in May, and hiring notched a 17-year high, adding to a debate at the Bank of England about how soon it should raise rates. The BoE is widely expected to be the first major central bank to begin hiking interest rates from a record low of 0.5 percent — although not until next year. “Record low interest rates are no longer necessary. The (UK) economy is growing rapidly and, if anything, is picking up pace,” said Christian Schulz at Berenberg. Just as Britain’s recovery seems to be progressing at a faster rate than that of the neighbouring euro zone economy, parallel divergences have emerged within the currency union.
The bloc’s growth was once again supported by Germany and pointed to euro zone GDP expanding 0.4-0.5 percent this quarter. But French business activity slipped back into contraction after just two months of growth. Reuters
