Business activity in the euro zone's dominant service sector quickened in May, as promotions and stronger consumer demand in France helped companies win new business, a major survey showed on Thursday. The Eurozone Business Activity Index, which covers over 2,000 services companies, rose to 55.8 in May from 54.5 the previous month, beating the consensus forecast of 54.6. "It's good to see an upturn in the rate of growth in May which was driven by stronger growth of new business," said Chris Williamson, chief economist at NTC Research which compiles the survey for . The survey features data from businesses such as airlines, banks and restaurants in Germany, France, Ireland, Italy and Spain, which together account for around 83 percent of private sector output in the euro zone. May marked the 11th month of expansion for the sector, with the index keeping above the 50.0 threshold separating growth from contraction. However, the pace of expansion remained lower than peak levels seen in late 2003 and in January.
OIL PRICES SQUEEZE MARGINS
Soaring oil prices put pressure on margins in May, as companies faced heftier fuel and energy bills but, in a highly competitive environment, were unable to pass the costs on to customers. "The discrepancy between input prices and prices charged is a big concern amongst many companies at the moment," said Williamson. "That's squeezing profits and restraining employment growth." Input prices rose at their fastest pace since April 2002, whilst prices charged fell for the fourth month in a row, though the pace of decline slowed. Rising input prices restrained companies' optimism about the future. The business expectations index, which tracks whether companies expect business to be better, the same or worse in 12 months' time, rose to 66.1 from April's 11-month low of 64.2, but remained well under January's peak of 71.5. Weak consumer demand, concerns over the strength of the euro and worries over the geopolitical situations also helped keep the index at a relatively low level.
END OF JOB LOSSES?
But the rise in new business counterbalanced the negative effects of oil prices on the job market. The euro zone employment index came in at 50.0, showing that overall jobs were not lost in the euro zone services sector for the first time in seven months. "If it wasn't for further job losses in Germany we would be looking at a much brighter overall employment scenario," said Williamson. Germany showed the weakest services growth of the big four countries, with its business activity index edging up just 0.3 of a point to 53.6 in May. Unlike France and Italy, German services companies reported a fall in employment levels, with the pace of job cuts accelerating a little on the month. The French business activity index jumped to 58.5 from April's 55.0, whereas the Italian index showed more modest growth to 56.9 from 55.8. The companion U.S. survey is due at 1400 GMT on Thursday. The Institute for Supply Management's non-manufacturing index is forecast to slip to 66.0 in May from April's 68.4. The euro zone manufacturing PMI on Tuesday showed the sector expanding at its fastest pace in over three and a half years.
Manufacturers have benefited from strong export growth and have been less affected by weak consumer demand than their colleagues in the service sector because they are less reliant on the domestic market. NTC said that together, the services and manufacturing surveys were consistent with quarterly euro zone gross domestic product (GDP) growth of 0.6 percent in the three months to May. "On the whole, it's a positive survey in May, although... it's not strong enough by any means to suggest that interest rates need to be raised," said Williamson. "It also means that there is no rate cut necessary either." Economists expect the European Central Bank to leave interest rates at 2.0 percent at its meeting on Thursday and through the rest of the year, before starting hikes in 2005.///