Business activity in the euro zone's dominant services sector grew more slowly last month as the euro's strength hit demand from manufacturing companies, a survey showed on Wednesday. The Eurozone Business Activity Index, which covers more than 2,000 companies in Germany, France, Italy, Spain and Ireland, slipped to 56.2 -- below a consensus forecast of 57.1 -- from 57.3 in January.
However, a pick-up in consumer demand helped keep it well above the key 50 watermark between contraction and expansion for the eighth consecutive month. "The easing (is) primarily reflecting some weakness from the manufacturing sector spilling over into the business-to-business services," said Chris Williamson, chief economist at NTC Research, which compiles the survey for . "But other sectors are holding up very well, notably the consumer sectors in countries like Germany and France." The national indices for the three main economies in the 12-nation euro area all registered a fall. French business activity eased to 58.6 from 60.1, the German index slipped to 54.1 from 55.2, and Italy weakened to 56.1 from 57.2.
The services sector accounts for about two thirds of the euro zone economy. Economists also expect slower growth in the services sector in the United States, the world's biggest economy and leader of the global recovery. The Institute for Supply Management's non-manufacturing index is due at 1500 GMT on Wednesday and is seen at 63.0 in February after 65.7 in January.
EURO WORRIES
The euro zone's expectations index, based on whether companies see business improving or worsening 12 months from now, slipped to 69.8 in February from 71.5 in January. "Expectations are being hit by the growing amount of negative commentary people are seeing in Europe about the long-term effects of the strong euro," said Williamson. The single currency peaked at a record high above $1.29 in mid-February, though it has since softened somewhat. The strong euro makes European exports more expensive for foreign buyers, putting pressure on companies to keep costs low to stay competitive and potentially hurting industry.
The companion survey of the manufacturing sector, which was released on Monday, showed the strong euro restraining the pace of growth in manufacturing, with the Eurozone Purchasing Managers' Index flat at 52.5 in February. The drive for lower costs is hitting jobs. The euro zone service sector employment index came in at 48.2, its lowest reading since September and marking the third consecutive month of job losses.
The services jobs market was particularly weak in Germany, where the index registered its 23rd month of contraction. "Firms are focusing very much on...extracting as much as they can out of their current workforces, allowing natural wastage to reduce workforce size," Williamson said. "With outstanding business growing at a marginal rate, that doesn't really bode well for the future outlook for employment (in Germany)." In France, however, backlogs rose to their highest level since November 2000 -- a sign that companies may soon be forced to take on new staff to cope with the increasing workload.
RATE CUT?
Slower services growth could provide more ammunition to those arguing that the European Central Bank needs to cut interest rates again to cushion the tentative economic recovery from the strong euro. All but one of the 62 economists in a poll last week saw the ECB leaving rates at current historic lows of 2.00 percent on Thursday. Forty nine said the next move in rates would be a hike, while 12 expected a cut. Although general optimism has been knocked a little this month, businesses across Europe remain more upbeat than downbeat about the future.
After months of being reluctant to part with their cash, there are signs that European consumers are finally starting to spend again and this could outweigh any falls in exports. "The signs from the survey are that growth will slow and not accelerate (over the coming months)," said NTC's Williamson. "But we would expect that slowdown not to be particularly marked, given the increasing buoyancy of consumer spending in countries like Germany and France and Spain."//