Daily Management Review

Business Growth In Euro Zone At Three Year High, But Caution Sounded By ECB


Business Growth In Euro Zone At Three Year High, But Caution Sounded By ECB
The speed of business growth in the euro zone in May was the fastest in more than three years, according to a survey published on Friday. However there was still need for the ECB to give emergency support to an uncertain economic recovery of the region, said European Central Bank President Christine Lagarde.
The pace of vaccination in the region is currently getting accelerated after a slow beginning which has allowed governments to ease the restrictions imposed to curb the spread of the coronavirus. There has also been a strong resurgence in the now-reopening service industry of the bloc which added to the impetus from a booming manufacturing sector.
Some policy makers are already talking about the ECB to start ending some of its emergency measures and returning back to the more traditional forms of stimulus as the economy of the euro zone is recovering and there is an improvement in confidence.
However a cautious approach has been recommended by other experts arguing that the fledgling recovery is based on large amounts of ECB support and warned that a major drag on the economy of the region already is a recent rise in borrowing costs which reached two-year highs.
"We are committed to preserving favourable financing conditions. It's far too early and it's actually unnecessary to debate longer-term issues," Lagarde said on Friday. "I have repeatedly said that policymakers needed to provide the right bridge across the pandemic, well into the recovery, so we can actually deliver on our mandate."
Added to that is the expectation that support to their respective economies would be continued to be given by euro zone finance ministers. However on Friday they were upbeat about the prospects for the post-pandemic recovery of eth economy.  
The IHS Markit's flash Composite Purchasing Managers' Index, which is viewed as a good indicator of economic health, rose to 56.9 in May compared to April's final reading of 53.8 as more businesses started to reopen or  had at least adapted to the lockdowns.
That number was the highest since February 2018 and was well over the 50 mark – a number that is considered to separate business growth from contraction and was also more than the economists’ predicted modest rise to 55.1.
"We don't think today's euro area PMI data will cause the ECB to taper the PEPP next month," said George Buckley at Nomura.
Economists are expecting the economic growth of the euro zone to be at about 1.4 per cent for the current quarter.
"May's increase in the euro zone Composite PMI reflects the further lifting of virus restrictions in many parts of the region and suggests that the economic recovery is now underway," said Jessica Hinds at Capital Economics.
The rise in the activity of the services sector was the highest in almost a year in the largest economy of Europe – Germany, driven by easing down of pandemic induced restrictions. However there were production issues in an increasing number of factories because of supply bottlenecks in manufacturing sector. There was also a boom in business activity in France because of the lifting of a lockdown as economists predicted a rebound in the country’s economy because of business activity surging past expectations.