The euro zone's services sector expanded at a steady pace in July, but high oil prices continued to squeeze firms' profit margins while growth in new business eased, a survey of 2,000 companies showed on Wednesday. The Reuters Eurozone Business Activity Index held steady at 55.3 in July, the same level as in June and below the consensus forecast of 55.5. The index remains well above the 50 line that divides growth from contraction, but the rate of increase has slowed since the start of the year. "The PMI numbers confirm the euro zone recovery is being driven by export markets and that domestic demand is lagging behind," said Lena Komileva at Prebon Marshall Yamame in London. "The headline index shows a recovery is underway but high oil prices are acting as a headwind to investment, which is not an encouraging signal."
The business expectations index, which measures whether companies expect their business activity to have increased in 12 months' time, slipped to 65.2 in July, about six points below January's level. "It's a mixed picture, but we are holding at a reasonable rate of growth in the euro zone at the moment," said Chris Williamson at NTC Research, which compiles the surveys for . "The concerns are ... the consumer remains reluctant to spend, which is causing a drag on growth. At the same time the price of oil is rising which is causing inflationary pressures and squeezing operating margins," he added. The euro zone service sector accounts for about two thirds of the region's economy and is more reliant on domestic business than the manufacturing sector, where growth has been driven by export orders. The companion manufacturing survey, released on Monday, showed output increased in July at the fastest pace in nearly four years. The overall manufacturing index rose to 54.7 in July, matching May's 43-month high, from 54.4 in June. The Eurozone Composite Index, which combines the services and manufacturing data, rose to 56.0 in July from 55.6 in June. The U.S. services index, published by the Institute for Supply Management, is due at 1400 GMT on Wednesday and is expected to rise to 61.0 from 59.9 in June.
UNEMPLOYMENT WORRIES
The euro zone services survey covers businesses such as restaurants, banks and airlines in Germany, France, Ireland, Italy and Spain. It showed input prices edging lower, to an index level of 58.1 in July from a two-year high of 58.9 in June. But Williamson expected the index to move higher again in August to reflect the recent rise in crude prices. Faced with rising input costs, companies continued to cut jobs in July. The employment index slipped to 49.3 in July, its lowest level since March, while new business growth eased to 54.7 in July from June's four-month high of 55.1 and backlogs of work also eased in July.
"The employment picture is disappointing. New business is rising at a slower rate than business activity at the moment which means that companies are generally able to meet demand with current capacity levels," Williamson said. "It's a little softer then expected. What's most depressing is the fall in the employment component as it shows the economic recovery is still not creating any jobs," said Julian Jessop at Capital Economics in London. "This is not going to make consumers feel more confident and happier to spend." As high unemployment persists in the 12-nation bloc, consumers are likely to remain cautious about spending more. This in turn will limit firms' pricing power. Prices charged by firms in the euro zone fell slightly in July, particularly in Germany. But business activity growth in Germany picked up to its highest level since February 2004. In France, firms were able to raise prices modestly for the third consecutive month due to stronger consumer demand, allowing companies to offset some of their higher input prices. Of the major economies, Italy showed the fastest pace of business activity with the index at 58.0, but this was slightly down from June's 58.2 and new business growth also slowed.////