Growth in euro zone bounces back

Euro-zone economic growth is refusing to crumble and activity even bounced back this month, according to a closely watched survey.

The purchasing managers' index for the 15-country region rose unexpectedly in February, pointing to a recovery in confidence after recent financial market turmoil. The survey helped "underscore the fact that the fundamentals remain sound at the moment", José Manuel González-Páramo, executive board member of the European Central Bank (ECB) said.

The results however still pointed to a gradual trend slowdown that would increase pressure on the ECB to follow the US Federal Reserve and start cutting interest rates, analysts said.

They suggested growth was continuing at roughly the same pace in the final quarter of last year, when gross domestic product rose by 0.4 per cent. "We have a slowing in an orderly fashion; we're not falling off a cliff," said Jörg Krämer at Commerzbank in Frankfurt.

Service sector growth had stagnated in January but rebounded significantly this month, according to the survey. The manufacturing sector component of the index dropped, although without pointing to any dramatic decline in growth. The "composite" index rose from 51.8 points in January to a two-month high of 52.7. A figure of more than 50 is regarded as consistent with growth.

The apparent lack of any looming economic disaster could encourage the ECB to maintain a hawkish tone, especially with euro-zone inflation at a 14-year high of 3.2 per cent, beyond its target of an annual rate "below but close" to 2 per cent.

Higher oil prices are threatening to force upward revisions to ECB inflation forecasts next month. Combating inflation remains the central bank's top priority, but analysts expect the ECB to lower its euro-zone growth forecasts next month.

Although the purchasing managers' indices were stronger than expected, other data pointed to significant weaknesses.

In France, consumer spending fell 1.2 per cent in January - the largest fall since September 2006. Euro-zone industrial orders fell by 3.6 per cent in December. Such weakness could feed through into lower production figures. 

© 2008 The Irish Times

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