Eurozone economy displaying mixed signals

AP News
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Posted: May 23, 2016 11:34 AM
Eurozone economy displaying mixed signals

LONDON (AP) — Mixed economic signals emerged Monday about the state of the eurozone economy.

Though a closely watched survey of business activity pointed to waning economic growth following a strong start to the year, another report pointed to consumer confidence holding up, crucial for the region's prospects over the coming months.

Most forecasters are penciling in a slowdown in the economy over the rest of the year as many of the factors that previously buoyed growth have largely played out, such as the export-boosting fall in the value of the euro. The region also faces a number of risks from beyond its borders, such as the British vote on June 23 on whether to leave the European Union and ongoing uncertainty over China's economy.

Financial information company Markit found evidence that the slowdown is materializing. Its flash composite purchasing managers' index — a broad gauge of business activity across the services and manufacturing sectors — fell to a 16-month low of 52.9 points in May from April's 53.0. Anything above 50 indicates expansion.

The reading, which is based on approximately 85-90 percent of the final number of replies to the survey, is the latest in a series of indicators pointing to waning eurozone growth following a perky start to the year. Though Germany and France, the eurozone's top two economies, performed robustly, Markit found other countries were cooling.

Chris Williamson, Markit's chief economist, said the survey adds "further to the suggestion that the robust pace of economic growth seen in the first quarter will prove temporary."

Markit's survey points to second-quarter quarterly growth of 0.3 percent, which would be lower than the 0.5 percent recorded in the first three months of the year.

The first-quarter performance came in the face of huge volatility in global financial markets largely connected to uncertainty over the slowdown in China. Factors that helped the eurozone during the first quarter included further stimulus measures from the European Central Bank, a lower euro that helped boost exports, and falling prices that increased consumers' spending power.

Looking ahead, Williamson said the survey points to a further loss of momentum. Inflows of new work, he noted, showed the smallest rise for nearly a year-and-a-half, while optimism about the outlook in the services sector sank to its lowest since July 2015.

"The survey therefore paints a picture of a region stuck in a low-growth phase, managing to eke out frustratingly modest output and employment gains despite various ECB stimulus 'bazookas', a competitive exchange rate and households benefiting from falling prices," Williamson said.

Though Markit's survey suggested a loss of momentum, a separate survey from the European Union's executive branch found consumers fairly optimistic.

The European Commission's flash consumer confidence indicator rose 2.3 points to a four-month high of minus 7 in May. Though no reason for the increase was provided, analysts said it suggests that consumers are still enjoying some of the purchasing power benefits that come from falling prices —in the year to April, consumer prices in the eurozone were down 0.2 percent largely as a result of cheaper energy. The increase could also be due to an easing in tensions in financial markets.

Though welcome, Stephen Brown, European economist at Capital Economics, said the increase may be a one-off especially as firms' employment expectations have declined.

"Moreover, the rise in oil prices so far this year underscores our long-held view that disposable income growth is set to slow," he said. "The big picture is that we expect weaker growth in consumer spending to contribute to a slowdown in eurozone GDP growth from 1.5 percent last year to about 1.2 percent in 2016."