Euro zone business growth at 9-month high as services supports -flash PMI

By Jonathan Cable

LONDON (Reuters) -Surprisingly strong services growth meant the recovery in euro zone business activity gathered steam this month, expanding much faster than thought, according to a survey on Tuesday, the latest evidence the currency union could escape a recession.

A sister survey showed businesses in Britain reporting an unexpected bounce in activity as well as receding price pressures, suggesting the economic outlook across Europe may be less gloomy than predicted.

S&P Global's flash Composite Purchasing Managers' Index (PMI) for the 20 countries that use the euro, seen as a good gauge of the bloc's overall economic health, climbed to a nine-month high of 52.3 in February from January's 50.3.

That was comfortably above the 50 mark separating growth from contraction and above all forecasts in a Reuters poll which had predicted a more modest rise to 50.6.

"The healthy PMI readings for February pose upside risks to our growth forecast, raising odds that the euro zone could avoid contracting in Q1," said Rory Fennessy at Oxford Economics.

"Nevertheless, we stress that growth will still underwhelm this year, weighed down by still-high inflation, tightening financial conditions and soft global growth."

Business activity in Germany, Europe's largest economy, returned to growth for the first time in eight months in February thanks to easing supply bottlenecks and improved underlying demand, its PMI showed.

German investor sentiment continued on its recovery path in February, the ZEW economic research institute said on Tuesday.

France's PMI painted a similar picture, showing activity grew this month for the first time since October, helped by a slight easing in inflationary pressures and strength in the jobs market.

Implying the upswing in the region could continue, the euro zone PMI showed demand increasing for the first time since mid-2022, while firms again added to headcount. The euro zone new business index rose to 50.6 from 48.9.

Activity in the bloc's dominant services industry grew this month at its fastest pace since June and its PMI bounced to 53.0 from 50.8, above all estimates in a Reuters poll and far exceeding the median estimate for 51.0.

With recession fears fading, optimism about the year ahead improved again in February. The business expectations index rose to a nine-month high of 61.5, from 61.2 in January.

However, factory activity declined at a slightly sharper pace this month. The manufacturing PMI dipped to 48.5 from 48.8, confounding expectations in the Reuters poll for an uptick to 49.3 and below all forecasts.

But an index measuring output, which feeds into the composite PMI, bounced to 50.4 from 48.9, its first time above 50 since May.

Input costs barely rose and factories raised their selling prices at the slowest pace in almost two years. The output prices index fell to 58.3 from 61.6.

"The improved supply picture, together with the huge drop in gas prices over the past few months, helps to explain the drop in the manufacturing input price index to its lowest level since September 2020," said Jack Allen-Reynolds at Capital Economics.

Signs of easing price pressures are likely to be welcomed by policymakers at the European Central Bank who have been aggressively raising borrowing costs in an attempt to rein in inflation running well above its target.

A Reuters poll last week found the ECB will raise its deposit rate at least twice more, taking it to a terminal rate of 3.25% next quarter.

(Reporting by Jonathan Cable; Editing by Susan Fenton and Catherine Evans)