Two-speed euro zone economy as services shine, factories struggle -PMI

© Reuters. FILE PHOTO: The skyline of La Defense business district is seen behind the Trocadero square during a warm and sunny day as a heatwave combined with pollution led to circulation restrictions in Paris, France, June 25, 2020. REUTERS/Charles Platiau

By Jonathan Cable

LONDON (Reuters) -Euro zone business growth unexpectedly accelerated this month, with the bloc's dominant services sector seeing a sharp increase in activity as consumers shrugged off soaring prices, a survey showed.

Manufacturers, however, struggled as supply chain disruptions caused by the pandemic have been exacerbated by Russia's invasion of Ukraine and renewed lockdowns in China.

S&P Global (NYSE:SPGI)'s Flash Composite Purchasing Managers' Index, seen as a good gauge of overall economic health, rose to 55.8 in April from 54.9 in March, confounding expectations in a Reuters poll for a fall to 53.9.

Any reading above 50 indicates growth.

"The detail showed this was driven entirely by the services component, but the manufacturing output PMI fell as supply constraints exacerbated by the Ukraine war and lockdowns in China took their toll, especially on the auto sector," said Jessica Hinds at Capital Economics.

It was a similar story in Germany where the manufacturing sector saw much slower growth due to supply disruptions and a drop in new orders whereas the services sector of Europe's biggest economy accelerated, earlier data showed.

French business activity grew at the fastest pace in more than four years as the euro zone's second-biggest economy benefited from fewer COVID-19 restrictions, more job creation and higher orders.

However, in Britain, outside the currency bloc and European Union, the private sector suffered a sharp slowdown this month as high inflation and the conflict in Ukraine weighed on the country's giant services sector.

INFLATIONARY PRESSURE

A PMI covering the euro zone services industry rose to an eight-month high of 57.7 in April from 55.6 in March. The median forecast in a Reuters poll was for a decline to 55.0.

But the factory PMI fell to a 16-month low of 55.3, from 56.5 in March, although it beat analysts' forecast of 54.7. An index measuring output which feeds into the composite PMI sank to 50.4 from 53.1.

Growth in demand for manufactured goods waned and the new orders index fell to 51.4 from 53.7, its lowest reading since around the time the pandemic was tightening its grip and indicating no imminent turnaround.

Conversely with more of the economy reopening and life returning to a sense of normalcy, demand for services increased despite rising prices. The new business index rose to 56.4 from 54.2 a month earlier.

Inflation in the bloc was 7.5% last month, almost four times the European Central Bank's 2% target and the latest PMI survey suggests it has further to rise. The composite output prices index was a record high 68.5, up from 65.7.

The ECB confirmed plans last week to end its hallmark stimulus scheme in the third quarter and another Reuters poll suggested the bank was likely to raise its deposit rate by the end of the year.[ECILT/EU]

"With this PMI signalling continued economic recovery, risks to the inflation outlook remain skewed to the upside and that is likely to be another argument for the ECB to move faster than initially expected," said Bert Colijn at ING.