Europe Economy

Euro Zone Services Growth Snaps Back in Feb.


Euro zone services growth sprang back from a 4-1/2-year low in February, above forecasts, challenging the case for an imminent European Central Bank rate cut, a survey showed on Friday.

The RBS/NTC Flash Eurozone Services Purchasing Managers Index for February jumped to 52.3 from 50.6 in January, beating the consensus forecast for a small rise to 50.7. Only one of 39 analysts polled by Reuters had predicted a stronger number.

The flash manufacturing PMI eased as expected to 52.3 from 52.8 the previous month, still keeping well above the 50 mark that divides growth from contraction. But growth in factory gate prices soared to its fastest in nearly a year.

The euro hit a two-week high against the dollar at $1.4844 after the data, while Bunds pared gains.

The report followed data showing French consumer spending suffered its sharpest monthly drop in more than a year in January as households faced surging energy and food costs.

The services data will provide some relief for the ECB, fearful of a sharp slowdown in growth at a time when inflation remains high. This in turn could ease pressure on the bank to cut rates as soon as March or April as some analysts predict.

Markets have this week pared back the possibility of an ECB cut by June to less than 50 percent, compared with almost fully pricing in two cuts only two weeks ago.

"This bodes well for the ECB which has always maintained that the slowdown in the economy won't be abrupt," said Aurelio Maccario at Unicredit MIB.

"The ECB is in no rush to cut rates," he said although he expected the bank would eventually acknowledge slower growth and cut rates in the second quarter.

Jacques Cailloux, chief euro area economist at RBS, which sponsors the data, said the figures did not support his own forecast for the timing of an ECB interest rate cut from 4.0 percent, recently moved forward to April.

"This reduces the chance of an early cut. We would need a decline in the PMI to validate an April cut."

While growth input prices and prices charged in the services sector cooled in February, they remained elevated. NTC said in a the release: "There was some evidence of second-round effects with wages reported to be higher."

That also makes an imminent rate cut less likely.

Stock Market Turnaround

A partial rebound in February was probably the result of a pick-up in equity markets, which took a beating at the end of January and sent the PMI down sharply based on survey responses collected toward the end of last month.

The employment index also rose to 54.4 in February from 54.1 in January, suggesting that businesses in the services sector remained confident about hiring.

"You cannot have a full-blown downturn without a meaningful decline in the pace of hiring," Cailloux said. But he predicted the overall trend for the PMIs would stay down.

Manufacturing saw a moderate easing in the pace of growth in February, to a rate economists had expected although export growth slowed abruptly to its lowest since May 2005.

Yet input prices leapt again as higher energy and fuel costs bit into costs, bringing the input prices index to its highest since July. Brent crude oil prices are again near $100 a barrel.