U.S. News

Eurozone June Services Growth Best Since World Cup

By Reuters

Eurozone services growth unexpectedly powered ahead in June at its fastest clip since last year's World Cup soccer tournament while manufacturing expansion also gathered pace, suggesting interest rates have further to climb.

The RBS/NTC economics flash Purchasing Manager Index reports on Thursday also showed the strongest services jobs growth in a year and the best for manufacturers in 6-1/2 years in an economy growing at or above capacity that could spawn future inflation.

The flash Eurozone services PMI for June spiked to 58.3 from a final 57.3 in May, reaching its highest in a year and confounding analysts' expectations for it to hold steady. The 50.0 mark is the dividing line between growth and contraction.

The flash manufacturing PMI rose for the first time in four months to 55.4 in June from 55.0 and also better than the dip to 54.9 economists had expected, giving little reason to believe a slowdown is at hand.

Indeed, the composite PMI, which rose to 57.7 from 56.8 suggested that the 13-member bloc grew at a breezy 0.7% pace in the second quarter despite a series of European Central Bank interest rate hikes to 4.0%.

And with incoming new business for the vast services sector also clocking its best rate since the World Cup last summer -- which was the best stretch for services growth since the boom times of 2000 -- it is likely to stoke further concern that the ECB has more than one rate hike left in store.

"The implication for monetary policy is straightforward: the ECB will keep going until 4.50% in December," said Aurelio Maccario, economist at Unicredit in Milan.

Bund futures, which were already under pressure early in the session, briefly ticked lower after the figures were released but then recovered completely within a few minutes. There was no reaction to the data on foreign exchange markets.

Price Pressure on the Rise

Jacques Cailloux, head of euro area economics at RBS, which sponsors the data, said the data suggested, at least on the services side that the economy was firing on all cylinders.

"There is clearly a sense that the pace of demand growth here is stronger than what we've seen in terms of the capacity to produce," he said. "So that's putting the corporate sector under pressure, it's giving pricing power".

Indeed, flash sub-indices showed price pressures picking up. The services sector input prices index rose to 59.3 in June from 58.4 while the prices charged index climbed to 54.2 from 53.1.

While NTC said there had not been any noticeable increase in the number of survey panellists saying wage costs were headed higher -- a key area of concern for the ECB -- it also said companies remained able to charge more.

The picture was slightly different for manufacturing, where growth in output prices charged eased to its weakest since February 2006 but input cost inflation rose above its average level so far this year.

More importantly, business activity reversed a recent trend.

"This should allay some of the fears that confidence and, with it, industrial production and investment growth, may now be on a slowing path," said Sandra Petcov at Lehman Brothers.

Work appeared to be piling up as well for services companies, with the index measuring growth in outstanding business at its highest since May 2000.

Cailloux said while the composite PMI suggested 0.7% growth for Q2, for June alone, it pointed to 0.8% quarterly GDP growth, which if sustained would put the euro zone expansion close to 3.0% on an annualised basis.