Euro Zone Business Activity Boosted by Olympics

By Jonathan Cable
LONDON (Reuters) – Euro zone business activity received a boost from France hosting the Olympic Games last month. However, the malaise in the bloc is likely to return once the Paralympics wraps up, as demand remains weak, a survey showed.

HCOB’s composite Purchasing Managers’ Index (PMI) for euro zone countries, compiled by S&P Global, jumped to 51.0 in August from July’s 50.2. This exceeded the 50 mark separating growth from contraction for a sixth consecutive month but was slightly below a preliminary estimate of 51.2.

“An Olympics-driven rise in the euro zone’s composite PMI in August masks the underlying picture that the bloc’s current growth momentum is weak,” said Rory Fennessy at Oxford Economics. He added, “This adds further fuel to the fire for the ECB to cut rates on 12 September.”

According to a poll, the European Central Bank is expected to cut its deposit rate twice more this year, in September and December, with an over-80% majority of economists agreeing.

France’s services sector experienced its most robust expansion in over two years in August. However, growth in Germany slowed for a third consecutive month, indicating that Europe’s largest economy is losing steam. Sentiment among German exporters is deteriorating, with the economic institute IfW Kiel predicting a 0.1% contraction in Germany’s economy this year.

In Britain, outside the EU, services activity grew at its fastest pace since April, and price pressures eased, pointing to a more benign inflation outlook following July’s elections. The Bank of England is expected to cut interest rates just once more this year, in November.

Overall demand in the 20-member currency union has fallen for a third month, suggesting weakness ahead. The composite new business index was below the 50 threshold at 49.1, although slightly better than July’s 49.0.

A final PMI for the dominant services industry in the bloc leapt to 52.9 from 51.9, offsetting ongoing contraction in the manufacturing sector. However, optimism about the year ahead has dropped among services firms, with the business expectations index declining to 59.1 from 60.4, the lowest reading this year.