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Europe — France and Germany drive expansion offsetting muted growth in Spain and contraction in Italy

05 August 2010

The latest Purchasing Managers Index (PMI) published by financial information services company Markit shows that business activity rose in Germany, France, Spain and Ireland during July, but Italy reported a contraction for the first time since last November. Furthermore, with only very modest expansion seen in Spain (the weakest for three months), growth of business activity for the single currency area remained heavily reliant on the big-two economies of France and Germany.

France saw the fastest rate of expansion of all countries covered by the survey, with growth close to May's 44-month high. Germany also saw activity accelerate, reporting the quickest pace in almost three years. Outside of France and Germany, the average rate of growth slowed for the second month running and was only marginal. This was despite the rate of expansion hitting a 33-month peak in Ireland.

July saw growth of new business pick-up slightly from June’s four-month low. However, the rate of expansion was still muted and below the earlier flash estimate. France saw by far the fastest rate of expansion, followed by Germany. Growth of new orders eased in Ireland and returned to marginal expansion in Spain. However, the weakest performance was registered by Italy, where new business fell for the first time in eight months, declining at the steepest pace since August 2009.

Service sector staffing levels increased for the third successive month in July, as companies raised employment in response to growth of business activity and backlogs of work. The fastest job creation was seen in France, where the rate of increase was the quickest since April 2008. Germany also saw better jobs growth, and Italian and Irish services employment fell at slower rates than in June. However, job losses accelerated in Spain.

Backlogs of work rose for the sixth month running, led by a marked gain in France. Italy, Spain and Ireland all reported lower backlogs.

July saw business confidence improve for the first time since April, in contrast to the further reduction in optimism signalled by the flash estimate. Companies were buoyed by the recent improvement in economic conditions, with many expecting this to continue.

However, Germany and Spain were the only nations to see improvements in optimism in July. Confidence fell to 11 and 12-month lows in France and Italy respectively, and hit a three-month low in Ireland.

Higher fuel prices and salary costs led to a further increase in average input prices in July. Costs have now risen in each of the past eight months. However, the latest rate of increase was the weakest since February and below the earlier flash estimate. Only Spain reported faster inflation of costs. Rates of increase slowed in Germany, France and Italy, while costs continued to fall in Ireland.

Strong competition eroded pricing power in July, with average charges falling for the twenty-first month in a row. Germany reported only a negligible reduction in output prices, but rates of decline were steep in both Spain and Ireland.

Chris Williamson, Chief Economist at Markit, said "the Euro area service sector sustained the strong growth momentum seen in the second quarter, encouraging firms to take on staff at the fastest rate since April 2008."

"The overall outlook for the region is therefore buoyed by these headline numbers, suggesting a double-dip recession will be avoided as the recovery becomes self-sustaining."

"However, growth differences widened between the major national economies. While activity accelerated in France and Germany, Italy slid back into contraction and growth slowed closer to stagnation in Spain."

"More encouragingly, an acceleration of growth in Ireland to the fastest since late-2007 suggests that the Euro area's periphery can bounce back from the sovereign debt crisis."



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