Reuters
London

Eurozone businesses are about to mark their best quarter in 4-1/2 years but those in core economies reported a slight loss of momentum running into year-end with still no sign of inflation picking up, surveys showed yesterday.
The data, compiled by Markit, leave open the debate over whether the European Central Bank’s loose monetary policy will have to be made even looser still in the coming year to meet its inflation goal of close to, but just below, 2%.
Businesses in the eurozone’s smaller economies made up for what the core members lost, Markit said.
Growth in Germany’s private sector slowed and in France, the eurozone’s second largest economy, activity fell to near-stagnation with the services sector decelerating sharply following the November 13 attacks on Paris.
But that did not spread to the wider eurozone data.
“Eurozone PMIs showed good resilience in December, remaining at healthy levels even in the wake of the headwinds from the Paris terrorist attacks,” said Marco Valli, economist at UniCredit.
“Low (and falling) energy prices, stimulus from past euro depreciation and improving domestic fundamentals continue to shield the eurozone economy from a persistently weak global trade environment.”
Markit’s Composite Flash Purchasing Managers’ Index (PMI) for the eurozone, based on surveys of thousands of companies and seen as a good guide to growth, slipped to 54.0 from November’s 54.2.
While a Reuters poll had suggested it would hold steady at November’s level, it has been above the 50 mark that separates growth from contraction since July 2013.
Markit said the PMI pointed to fourth quarter economic growth of 0.4%, in line with predictions from economists in a Reuters poll published last week.
The ECB eased policy again earlier this month, cutting its deposit rate and extending its asset-buying programme. ECB President Mario Draghi said on Monday inflation should reach its 2% target ceiling “without undue delay”.
But that easing fell short of market expectations, leaving many speculating that larger monthly asset purchases may still be required. The latest PMIs showed firms cut prices for a third month as they struggled to generate meaningful growth.
“Growth is not strong enough to generate inflationary pressure and we suspect that it will slow further as the effects of falling inflation and the earlier depreciation of the euro fade,” said Jennifer McKeown at Capital Economics.
“As such, pressure is likely to mount on the ECB to offer bolder policy support after its disappointingly timid action earlier this month.”
The likelihood the ECB tops up the €60bn a month it is currently spending on buying government bonds is just 40%, a Reuters poll found, as Draghi faces opposition from more conservative policymakers on the ECB’s Governing Council.
As investors debate whether the ECB does loosen policy again, most are convinced the US Federal Reserve will increase borrowing costs for the world’s largest economy later on Wednesday.
Britain’s Bank of England is expected to follow the Fed’s path — albeit not until the second quarter of 2016 — although the pay of workers in Britain grew at its slowest in pace since early 2015 in the three months to October, underscoring one of the reasons why the BoE is in no rush.
Shares and bond markets rose and the dollar dipped yesterday, as investors readied for what would be the first rise in US interest rates in almost a decade.
Prices rose just 0.2% in the eurozone last month on a year ago, official data showed on Wednesday. Perhaps worryingly for policymakers, the composite output price index was below 50 for a third month, holding steady at 49.5.
Despite that, a PMI covering the bloc’s dominant service industry fell to 53.9 from November’s 54.2. But firms were more optimistic about the coming year. The business expectations sub-index climbed to a four-month high of 63.0 from 62.4.
Manufacturers had a better end to the year than expected. Their PMI rose to a 20-month high of 53.1, confounding forecasts for it to hold steady at November’s 52.8.
The output index, which feeds into the composite PMI, jumped to 54.4 from 54.0, also a 20 month high.
Growth was driven by new orders coming in at their fastest rate since early 2014 — the sub-index rose to 54.0 from 53.5 — with demand picking up as a weaker euro made manufactured goods cheaper abroad.