Europe Economy

Euro-Zone Services Activity Slowed in March


Euro zone services growth slowed further last month as the credit crunch tightened its grip, while price pressures hit a 9-month high, according to final data from a survey of businesses published on Thursday.

The RBS/NTC Eurozone Purchasing Managers index for Europe's dominant services sector came in at 51.6 in March, below February's 52.3 and just under the flash estimate, and economists' forecast, of 51.7.

The figures stand in contrast to expectations for U.S. data due later on Thursday, which are likely to show the services sector there contracted again in March.

Financial markets showed little reaction to the figures although the euro was lower on the session following a broad dollar rally, hit further on news of an unexpected fall in euro zone retail sales.

The RBS/NTC survey showed business expectations fell to a low not seen since 2002 and differences in performance among the bloc's four largest economies became even more pronounced.

"I'm not optimistic we'll see a turnaround any time soon. The picture is slowly but steadily deteriorating at the EMU level," said Marco Valli at Unicredit MIB.

The index of German business activity fell to 51.8, still above the 50 mark that separates growth from contraction.

Italy's recovered slightly but remained negative with business activity at 48.8 compared to the previous month's 47.2.

The French index slipped to 57.3 from February's 58.2 and Spanish business levels contracted at the fastest pace since the survey started in 1999, slumping to 40.9 from 46.1.

"In Spain it seems to be an all-round malaise," said Chris Williamson at NTC Economics, which compiles the data, calling the numbers "dreadful." Data also released on Thursday showed Britain's service sector slowed more than expected in March as confidence fell and firms' margins were squeezed by a record rise in input prices.

Uncertain Outlook

The outlook for the 15-nation euro bloc remains shaky but economists still expect the European Central Bank to make two 25 basis point cuts to rates this year, according to a Reuters poll on Wednesday, with the first cut coming by September.

"The ECB is focused on the upside risks to inflation but as we go into the second quarter we are going to see some softening in their neutral stance and the emergence of a rate cut debate," said Matthew Sharratt, an economist at Bank of America.

Expectations for the future darkened. The expectations index of businesses in the sector, which covers companies ranging from insurance brokers to hotels, fell to 58.2 -- the lowest since November 2002.

At the same time, the prices outlook deteriorated. The input price index jumped to 63.2 from February's 60.6 while prices charged climbed nearly two points to 53.9, the highest since June, and up slightly from the flash reading.

Rising inflation will make it difficult for the ECB to cut interest rates in coming months.

Official inflation in March jumped to a new high of 3.5 percent, well above the bank's target of just below 2.0 percent.

The euro zone composite index was 51.8 in March, down from the 51.9 flash estimate and February's 52.8 and came after data released on Tuesday showed manufacturing activity cooled in March as output growth in France and Germany was countered by a record fall in Spain and further contraction in Italy.