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Thursday, April 3, 2008

France Services PMI and EU Economic Sentiment Indicator March 2008

European services growth slowed in March after the euro rose to a record and the U.S. economic downturn deepened. Royal Bank of Scotland Group Plc said its index of growth in service industries from banks to airlines fell to 51.6 from 52.3 in February. That's lower than an initial estimate of 51.7 published March 20. The index is based on a survey of purchasing managers and a reading above 50 indicates expansion.

France remained the only one of the Eurozone’s four largest national economies to see growth holding up close to that seen last year, with its rate of expansion continuing to far exceed that of the other big-four. Business activity in the German service sector also continued to expand, but the rate of growth remained well down on last year, resuming an easing trend in March to register the third weakest monthly growth of the past three years. Spain and Italy, on the other hand, both reported falling levels of business activity for the third and fourth consecutive month respectively. The rate of decline in Italy was the third steepest in the past three years. Meanwhile, a marked acceleration in the rate of decline was seen in Spain to a pace far above that of Italy and the fastest in the survey’s eight-and-ahalf year history.

New business growth slowed among French service companies in March although the services sector as a whole continued to expand at a fairly robust pace. The NTC/CDAF Research's Purchasing Managers' Index (PMI), which covers businesses ranging from telecoms to transport, fell to 57.3 in March from 58.2 in February, but kept above the 50 mark separating growth from contraction for a 57th month running.

The new business index fell to 56.6 in March from 57.2 in February, showing demand in the euro zone's second largest economy is easing but still remains solid.

"This report seems to suggest that there's still some robust spending occurring, certainly on services," said NTC's chief economist Chris Williamson.

While consumer confidence hovers at its lowest level in over 20 years, the French Statistics Office (INSEE) expects French households to remain resilient and buoy the economy this year by dipping into their savings. While surveys consistently show the French are worried about high inflation eroding their purchasing power, these concerns evidently did not feed into actual spending in February, which rebounded according to the latest data from INSEE.

Inflation made its presence felt in the March PMI, as the input price sub-index rose to its highest since November, and the 'prices charged' index rose to its highest level since January. But NTC's Williamson said that France's rising prices had yet to have negative effects on other elements in the service sector such as employment, which rose on the month.

"If non-staff costs are rising, they may look at trimming wage costs. But that doesn't seem to be happening here because the employment index is still remaining at this robust level," he said

The European Commission has also now reported its eurozone “economic sentiment” indicator for March, with the composite number bouncing back a little from the February reading which its lowest level since December 2005. The indicator, which gauges optimism across all economic sectors and is regarded as a good guide to likely future trends, was back up to 102 after falling to 100.1 in February from 101.7 in January. As we can see in some of the counries shown in the chart below, the picture is a mixed one, with Germany for the time being holding reasonably stable, climbing back to 104 from 103.7 in February, Ireland hovering nervously, Italy continuing its steady downward path, and Spain continuing to head steadily off the map. The March reading in Spain was 83.9 which was down from 87.5 in February. I suppose here it is a case of how low can you go before you hit bottom. Yet awhile I suspect.

France is also holding up fairly well rising to a composite 105.6, from 105.2 in February.

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