Euro-Zone Business Activity Slows Slightly, Boosting Case for ECB Action

By Paul Hannon 

        Business activity in the euro zone slowed slightly in May, a sign that economic growth in the currency area is unlikely to prove strong enough to significantly reduce near record rates of joblessness, or allow governments to quickly end a surge in debt levels.
        Following the release of weak first-quarter growth figures from across the currency area last week, European Central Bank officials have repeated that they are likely to take action to boost growth and inflation when they next meet on June 5.
        The results of a survey of 5,000 businesses across the euro zone released Thursday will provide further reason for them to act. In addition to the slowdown in activity, the surveys recorded another month in which businesses cut their prices, even as their costs rose.
        "Deflationary pressures remain a major issue...and the continuing fall in average prices charged for goods and services adds to the likelihood of the ECB taking action to boost the economy at its June meeting," said Chris Williamson, chief economist at Markit, which conducted the surveys.
        Markit's composite Purchasing Managers Index for the euro zone--which measures activity across both the manufacturing and services sectors--fell to 53.9 from 54.0 in April, in line with economists' forecasts.
        The PMIs are on course to be higher in the second than in the first quarter, an indication that growth may pick up slightly. The euro-zone economy grew at an annualized rate of 0.8% during the first quarter, unchanged from the final three months of 2013.
        The currency area returned to growth in the second quarter of last year, and there are signs that even at the modest rates recorded to date, that expansion is beginning to have an impact on the jobs market.
        According to the surveys, businesses hired in May, and at the fastest rate since September 2011. However, hiring rates remained modest, and it will therefore take some time before unemployment rates fall significantly.
        France remained a drag on the euro zone's recovery. According to the surveys, private sector activity declined in May, a sign that economic growth in the euro zone's second largest member has yet to pick up after a flat start to the year.
        As in the first quarter, there was a marked contrast in the performance of Germany's economy, with the survey of 1,000 companies pointing to a continuation of strong growth, but with an increasing reliance on the services sector and domestic demand.
        There were few signs of an imminent improvement in the economy's fortunes.
        "With new orders and employment both falling at sharper rates in the latest month, the malaise looks set to persist, dashing hopes of any convincing recovery taking hold," said Jack Kennedy, an economist at Markit.
        Germany's economy was almost alone within the euro zone in recording a robust expansion in the first quarter, and that appears to have continued into the second.
        Markit's composite PMI for Germany was unchanged at 56.1. But while the manufacturing PMI fell to 52.9 from 54.1 in April to hit a six-month low, the services PMI rose to 56.4 from 54.7 in April to reach a three-year high. That indicates that domestic demand, rather than exports, is playing a bigger role in driving the expansion, a continuation of a development seen in the first quarter.
        Write to Paul Hannon at paul.hannon@wsj.com
        (END) Dow Jones Newswires

        May 22, 2014 04:55 ET (08:55 GMT)