Europe Services Growth Accelerated More Than Forecast
Growth in Europe's service industries accelerated more than economists forecast in February, prompting investors to reduce bets on European Central Bank interest-rate cuts.
Royal Bank of Scotland Group Plc's index of services, industries including banks, consultancies and airlines, rose to 52.3 from 50.6 in January, according to a preliminary estimate today. Economists expected a reading of 51, according to the median of 38 forecasts in a Bloomberg News survey.
The euro rose as the report indicated economic growth in Europe is withstanding a slowdown in the U.S. and U.K., reducing the need for the ECB to lower borrowing costs. While the European Commission yesterday cut its forecast for the euro region's 2008 expansion to 1.8 percent, the weakest since 2005, it predicted accelerating inflation.
“The euro area is likely to prove fairly resilient to headwinds,'' Klaus Baader, Merrill Lynch & Co.'s London-based chief European economist, said in a Bloomberg Television interview. “If we continue to see that kind of data, markets will reconsider their expectations'' for ECB interest rates.
European government notes headed for their biggest weekly drop in almost four years as traders bet rising consumer prices will limit the scope of policy makers to follow their U.S. and British counterparts in cutting rates. The yield on the two-year German note rose 24 basis points, the biggest weekly advance since April 2004, to 3.35 percent by 3:20 p.m. in Paris.
The euro rose to $1.4850 from as low as $1.4789 before the report. Yields on interest-rate futures pared their decline.
Composite Index
Royal Bank's composite purchasing managers' index, which combines services and manufacturing and accounts for about half of the economy, rose to 52.7 from 51.8. A gauge of manufacturing slipped to 52.3 from 52.8, in line with economists' forecasts.
European companies have depended on sales to emerging markets and price increases to cushion against rising material costs and the fallout from the U.S. property slump.
Nestle SA, the world's biggest food company, yesterday reported second-half earnings that exceeded analyst estimates, after it passed on higher commodity costs to consumers by increasing prices of Dreyer's ice cream and Nescafe instant coffee.
Cap Gemini SA, Europe's largest computer-services provider, last week forecast higher profit margins, helped by growth in its Indian unit.
Bank Impact
The gain in services this month also may have reflected the impact in January of a record trading loss at Societe Generale SA, France's second-biggest bank, and writedowns at UBS AG no fax payday loans instant payday loan. The financial industry accounts for about 18 percent of the services index.
The rebound is probably temporary after several months of decline, said David Brown, chief European economist at Bear Stearns Cos. in London.
Euro-zone economic confidence has been in “decline since the middle of 2006,'' Brown wrote in a note to investors. “This looks set to extend as we are nowhere near reaching a bottom yet.'' French government reports today showed a gauge of business confidence fell to the lowest in 13 months and consumer spending dropped by the most since September 2006.
The PMI's gauge of euro-region business expectations in service industries fell to 60.7 from 61.5 in January, today's report showed. Growth in manufacturing orders slowed, with a measure slipping to 51 from 51.7 last month.
Inflation Concerns
Higher energy prices and more expensive food are also fanning inflation, which the European Commission says will average 2.6 percent this year, up from a November estimate of 2.1 percent. At the same time, the U.S. slowdown is combining with costlier credit, oil prices at about $100 a barrel and a stronger euro to curb expansion, the commission said.
“The risks to the growth outlook are mainly on the downside,'' European Union Monetary Affairs Commissioner Joaquin Almunia told reporters in Brussels yesterday.
Investors had increased bets on a cut in Europe after ECB President Jean-Claude Trichet on Feb. 7 withdrew a threat to raise rates and expressed concern that the outlook for growth had deteriorated. The yield on interest-rate contracts maturing in December fell as low as 3.31 percent on Feb. 11 from 4.18 percent at the start of the year. It was at 3.62 percent today.
The ECB has held off lowering interest rates as inflation accelerated to a 14-year high of 3.2 percent in January, above the bank's 2 percent limit for a fifth month. The U.S. Federal Reserve cut its main rate by 1.25 percentage points last month, and the Bank of England reduced its benchmark by a quarter point on Feb. 7 for the second time in three months.
Trichet has signaled he's in no rush to act. On Feb. 14, he said central bankers in the U.S. and U.K. based their decisions on a “very different'' economic outlook.
The ECB “is going to push back a rate cut as long as it can,'' said Sylvain Broyer, an economist at Natixis in Frankfurt.