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Eurozone – Recovery eases in March but still close to 4.5-year high

06 April 2011

The Final Eurozone Composite Output Index, published by research firm Markit, posted 57.6 in March 2011, down from February's four-and-a-half year high of 58.2, but above the earlier flash estimate of 57.5.

The index has now signalled expansion for 20 consecutive months. Growth of new business was also little different from February's three-and a half year peak.

Manufacturing continued to lead the expansion, despite seeing the rate of increase in production ease to a three-month low. Service sector business activity meanwhile accelerated to the strongest since August 2007, suggesting a further broadening out of the recovery beyond the goods-producing sector.

All countries except France saw slower rates of expansion than February, but national growth disparities widened. France and Germany each saw strong increases in both manufacturing output and service sector activity, with inflows of new business remaining solid in all cases. But signs of weakness remain outside of the Franco-German core, especially in Spain, Ireland and Greece.

Output growth eased sharply in Ireland, Spain fell back into a services-led contraction and the downturn in Greek manufacturing continued. The rate of expansion in Italy also slowed, but was still close to February's three-and-a-half year peak.

Variations in national growth to a large extent continued to reflect differences in domestic demand. Germany and France saw solid increases in new orders in both services and manufacturing, including strong inflows of new exports. In contrast, growth of new orders in Italy, Spain and Ireland was generally manufacturing-led and focussed principally on exports. New business in the more domestic-facing service economies of these nations showed only modest gains in Italy and Ireland and declined slightly in Spain.

Outstanding business rose for the sixteenth successive month, with the rate of expansion only marginally below February's four-and-a-half year high. Germany and France both saw marked increases, but Italy, Spain and Ireland saw backlogs fall.

Employment rose for the eleventh month running, rising at a pace only marginally below February's three-year peak. Manufacturers reported a further near-record increase in staffing levels, but service providers reported only modest jobs growth. In both sectors, the strongest job creation was seen in Germany, including record jobs growth at manufacturers. France, Italy and Ireland also saw employment rise, despite job losses at service providers in the latter two, while Spain saw a further drop in overall staffing levels.

March saw average input costs rise to the greatest extent since July 2008, with the rate of inflation much higher in manufacturing than services. Rates of increase accelerated in France, Italy, Spain and Ireland. The steepest rise was seen in Germany, where the rate held close to February's record high.

Average charges rose for the eighth consecutive month in March, with the rate of increase close to February's two-and-a-half year high. Manufacturers' selling prices increased at a series record pace, while service charges rose only moderately. With the exception of Greece, all of the manufacturing surveys reported higher selling prices. However, while service providers in Germany and France saw further increases, those in Italy, Spain and Ireland reported further reductions.

Chris Williamson, Chief Economist at Markit said "the final Eurozone PMI data for March round off a solid first quarter, consistent with GDP rising by +0.8% on a quarter-on-quarter basis. Job creation also hit a new post-recession high in Q1 as companies look to expand capacity."

"National growth divergences widened, however, as domestic demand in the periphery continued to be affected by austerity measures and political uncertainty."

"Although the debt crisis in the periphery was affecting confidence, there was no evidence that the crisis in Japan had affected business materially, either directly through supply chain disruption or through worries about the economic outlook."

"The unrest in the Middle East and North Africa, on the other hand, continued to have an impact via higher oil prices. Input costs rose at a rate approaching the near eight-year highs seen in 2008, driving a further near-record rate of increase in average prices charged for goods and services."

"The combination of strong growth and elevated price inflation will no doubt pile further pressure on the European Central Bank to tighten policy."

The Euro area (EA17) consists of Belgium, Germany, Ireland, Greece, Spain, France, Italy, Cyprus, Luxembourg, Malta, the Netherlands, Austria, Portugal, Slovenia, Slovakia, Finland and Estonia.

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