The euro zone's dominant service sector grew at a slightly slower pace in June as demand growth eased in Germany and high oil prices continued to squeeze profit margins, a survey of 2,000 companies showed on Monday. The Eurozone Business Activity Index slipped to 55.3 in June from 55.8 the previous month, and below the consensus forecast of 55.6. But June marked the 12th month of expansion for the sector, which accounts for about two thirds of the euro zone economy, with the index still well above the 50.0 threshold separating growth from contraction. The pace of growth remained slightly above the average for the six-year-old series. High oil prices and a modest increase in wage inflation meant operating costs rose for the third consecutive month in June, hitting their highest level since April 2002. At the same time, the prices companies charge for their services have been falling across the sector since February, squeezing profit margins.
"Price pressures are building even more sharply so this is a concern," said Luke Thompson at NTC Research, which compiles the surveys for . "But a chink of light coming out of this month's euro zone manufacturing survey shows oil prices may have peaked, which will help ease input costs." The manufacturing index, released on Thursday, showed growth slowed in June to 54.4 from 54.7 in May because export demand was not strong enough to make up for lacklustre spending by domestic consumers. The Eurozone Composite Index, which combines the services data with the companion manufacturing survey, eased to 55.6 in June from 56.0 in May. NTC said PMI figures imply year-on-year gross domestic growth of 2.3 percent in the second quarter for the euro zone. The euro zone economy grew at 1.3 percent year-on-year in the first quarter.
NEW BUSINESS STRENGTHENS
The services survey covers businesses such as airlines, banks and restaurants in Germany, France, Ireland, Italy and Spain. It showed new business climbed to a four-month high of 55.1 in June from 54.6 in May and backlogs increased. In France and Italy, companies took on more staff to keep pace with demand. But the pace of growth of new business eased for the fifth successive month in Germany and competitive pressures put a squeeze on prices charged. "The key to rebuilding margins is a strong improvement in domestic demand, particularly in Germany, but until we see this, firms' pricing power will remain weak," said Thompson. He said firms would also want to see stronger demand growth before creating more jobs. The survey showed employment in the German services sector shrinking faster in June, with the jobs index falling to 46.4 from 47.4. That weighed on the euro zone employment index, which slipped to 49.9 from 50.0 in May, despite employment growth in France, Italy and Spain. However, Thompson said: "Employment should return to a slow upward trend." Business growth accelerated most in Italy, where the index climbed to 58.2, its highest level since November 2003, while the rate of growth in business activity slowed in both Germany and France. "Italy's move to the head of the Eurozone services growth table reflected the strong upward growth momentum in the sector through the second quarter, as workloads increased in line with improving market conditions," NTC said. The euro zone business expectations index, which measures optimism about conditions over the next 12 months, slipped slightly to 64.7 from 66.1.///