World Economy

Eurozone Private Sector Growth Near 6-Year High

Eurozone companies are raising prices for their services and are beginning to hire again
PMIs showed that February private sector services activity in Europe’s four largest economies Germany, France, Italy  and Spain all improved.PMIs showed that February private sector services activity in Europe’s four largest economies Germany, France, Italy  and Spain all improved.

Eurozone private sector business activity rose at its quickest pace in nearly six years in February, accelerating across all major economies with job creation reaching its fastest in almost a decade, surveys showed.

The data, which came alongside news on Thursday that eurozone inflation had just surpassed the European Central Bank's target, could pose a challenge to policymakers in how to explain leaving monetary policy unchanged even as the economy picks up sharply, Reuters reported on Friday.

IHS Markit's final composite Purchasing Managers' Index—seen as a good overall growth indicator—rose sharply to 56.0 in February from 54.4 in the previous month. It has not been higher since April 2011 and was unchanged from a flash estimate.

While separate official data showed German retail sales unexpectedly dropped in January, the PMIs showed that February private sector services activity in Europe's four largest economies Germany, France, Italy and Spain all improved.

"The PMIs tell you that the economy is on a reasonably solid footing, obviously the economy is not roaring away to the extent that some of the other Anglo-Saxon economies have done over the course of recent years, but it is a pretty good place to be," said Peter Dixon, economist at Commerzbank.

Post-Election Fears

The reports suggest that rising concerns about potential upsets in coming eurozone elections, particularly the prospect of far-right leader Marine Le Pen posing a serious challenge for the presidency in France, are being shrugged off by the economy.

"We don't quite know what will happen in France following the election in April-May and that is probably the single biggest risk that the continent faces," Dixon added.

If sustained, economic growth could hit 0.6% in the first quarter, according to Markit. That would be much faster than the 0.4% economists predicted in a Reuters poll just last month. That forecast was based on hopes that there would be no major upsets in several national elections this year.

"The final PMI numbers paint a bright picture of a eurozone economy starting to fire on all cylinders. Growth accelerated in all of the four largest member states in February to suggest an increasingly sustainable and robust-looking upturn," said Chris Williamson, chief business economist at IHS Markit.

Optimism on the Rise

The reports suggest optimism is on the rise, eurozone companies are raising prices for their services, and crucially, they are beginning to hire again. The composite PMI employment index rose to 53.8 from 53.4, its highest since October 2007.

Business expectations indexes for the services sector and for all industries improved at the fastest rate in nearly six years.

Manufacturers, too, enjoyed their best month in nearly six years in February, boosted by a weaker euro, which helped drive strong demand for exports, a similar survey showed on Wednesday. The euro is expected to ease a bit further, according to a Reuters poll of currency strategists.

The renewed strength in the PMIs will be welcomed by the European Central Bank, which is expected to remain on the sidelines through upcoming national elections in three major economies in the currency bloc.

With the Federal Reserve set to raise interest rates further this year and pressure mounting on the ECB to consider scaling back its aggressively-stimulative monetary policy, the central bank will have a challenge with its messaging in the coming months.

"The acceleration in growth, employment and prices signaled by the surveys suggests that analysts will begin to pull forward their expectations of when the ECB could begin tapering its stimulus," added Williamson.

"However, it seems likely that central bank rhetoric will remain dovish in coming months, focusing on the headwinds that the economy faces in 2017, and specifically the need for policy to remain accommodative in the face of political uncertainty."

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