Euro zone businesses beat forecasts as growth holds strong

Indications that the euro zone economy remains robust could convince policymakers at the European Central Bank, which has its headquarters in Frankfurt, Germany, to taper its quantitative easing programme.
Indications that the euro zone economy remains robust could convince policymakers at the European Central Bank, which has its headquarters in Frankfurt, Germany, to taper its quantitative easing programme.PHOTO: REUTERS

Sept PMI data shows solid upturn overall, especially for factories as orders pour in

LONDON • Euro zone private businesses ended the quarter growing far more strongly than forecast, boosted by manufacturers, says a survey that indicates the momentum should carry into next month.

That energy, alongside growing inflationary pressures, is likely to raise expectations that the European Central Bank (ECB) will announce plans next month to reduce its monthly spending on quantitative easing.

IHS Markit's euro zone Flash Composite Purchasing Managers' Index (PMI) for this month, seen as a good guide to economic growth, rose to 56.7 from 55.7 for last month, comfortably above the 50 level that separates growth from contraction.

This month's reading was above all forecasts in a Reuters poll that had predicted a dip to 55.5. The euro gained 0.4 per cent to US$1.1989, on track to end the week higher.

Earlier PMIs from Germany and France showed that activity in the bloc's two largest economies also exceeded the top end of expectations in Reuters polls.

"The euro zone PMI suggests that the economy remains very strong and will embolden ECB policymakers. The price indexes of the Composite PMI also picked up in September," said economist Stephen Brown at Capital Economics.

It pointed to third-quarter growth of 0.7 per cent, said IHS Markit, above the median forecast of 0.5 per cent in a Reuters poll last week.

The upturn came despite businesses raising prices at one of the fastest rates this year. The output price index rose to 52.6 from 52.1.

"This rounds out a run of data that provides evidence of building pipeline inflation pressures. This will help to build a case for ECB tapering next year," said economist Bert Colijn at ING.

The PMI for manufacturing soared to 58.2 from 57.4, confounding expectations for a fall to 57.1 and chalking up its highest reading since February 2011. An index measuring output rose to a 61/2-year high of 59.5 from 58.3.

Suggesting that the solid pace would be maintained next month, factories built up a surplus of orders at the steepest rate in the sub-index's 15-year history. The backlogs of work index came in at 57.8, compared with 57.1 for last month.

"Companies are scrambling to expand capacity as fast as possible to meet orderbook growth, and increasing backlogs are presenting them with huge problems," said chief business economist Chris Williamson at IHS Markit.

Companies in the bloc's dominant service industry also had a much better month than expected - their PMI rose to 55.6. A Reuters poll had predicted no change from the 54.7 posted for last month.

With activity bustling and new orders flooding in, their optimism also increased. The business expectations index jumped to 66.1 from 64.0.

REUTERS

A version of this article appeared in the print edition of The Straits Times on September 23, 2017, with the headline 'Euro zone businesses beat forecasts as growth holds strong'. Print Edition | Subscribe