Eurozone business growth flagging as trade fears rise

London

EUROZONE business growth slowed more than expected this month as fears over a trade war with the United States and a weaker global expansion put another dent in optimism, a survey showed on Tuesday.

But growth remained robust and as it was accompanied by rising prices the survey is unlikely to concern policymakers at the European Central Bank too much as they look to move away from their ultra-loose monetary policy.

IHS Markit's Eurozone Composite Flash Purchasing Managers' Index (PMI), seen as a good guide to economic health, dipped in July to 54.3 from June's 54.9, coming in below all forecasts in a Reuters poll with a median of 54.8.

Anything above 50 indicates growth.

If maintained, the latest PMIs point to third quarter economic growth of 0.4 per cent in the eurozone, IHS Markit said. That is slightly weaker than the 0.5 per cent predicted in a Reuters poll last week.

"July's fall in the eurozone PMI comes as something of a disappointment but the index is still consistent with a decent pace of GDP growth," said Jessica Hinds at Capital Economics.

"All in all, today's data are unlikely to deter the ECB from normalising policy but the process is likely to be extremely gradual."

The ECB guided markets for steady rates "through the summer" of 2019 at its meeting last month, when it also announced it would shut a 2.6 trillion euro (S$4.1 trillion) bond-buying programme in December, ending its unprecedented stimulus scheme.

Germany's private sector grew faster than expected in July, earlier figures showed, but French business growth eased more than predicted. France and Germany are the only two eurozone members to have flash numbers.

Fears that trade conflict around the world is worsening have damaged confidence. The future output index, which gauges optimism, fell to 63.0 from 63.4, its lowest since late 2016.

"In July we have seen a big increase in the number of companies reporting they are worried about global economic growth and the impact of trade wars escalating," said Chris Williamson at survey compiler IHS Markit.

The United States has imposed tariffs on some Chinese imports, while threatening more, and President Donald Trump has called the European Union a trade foe.

"With the risk of a full-blown trade war increasing steadily, there is no reason to expect any sustained improvements in export orders and industry confidence over the next months," said Moritz Degler at Oxford Economics.

A PMI covering the bloc's dominant service industry fell to 54.4 from June's 55.2, missing expectations for a shallower drop to 55.0.

Worryingly for firms and also pointing to no pick-up, new business growth was at one of its weakest rates since the start of last year. The sub-index fell to 53.7 from 54.9.

However, manufacturers had a better July than expected. The factory PMI rose to 55.1 from 54.9, beating the median expectation for 54.6. An index measuring output - which feeds into the composite PMI - held steady at 54.2.

But factories slowed their purchasing of raw materials. The quantity of purchases index fell to 53.0 from 53.3, its lowest since September 2016. REUTERS