EuroZone: New Business Levels Fall, Private Sector Remains Subdued

04 July 2001

The latest Reuters Eurozone Composite Index, published monthly and derived from information gathered by NTC Research, shows a slowing European economy – both in the service and manufacturing sectors. The data is based on information provided by over 4,000 manufacturing and service sector companies.

An index reading of 50 indicates no change on the previous month. Readings above 50 signal growth, below 50 contraction. The greater the divergence from 50, the greater the rate of change signalled. All indexes are seasonally adjusted.

The four Manufacturing Indices indicate …

• The Composite Output Index rose very slightly in June, up from the twenty-nine month survey low of 51.1 recorded in May, to 51.3. Although up on May, the pace of growth signalled by the index remained weak in comparison with that seen throughout much of the survey's three-year history and well below the survey peak recorded in April of last year. A moderate improvement in the rate of growth of service sector activity was largely offset by an increase in the rate of contraction of manufacturing output during the month.

• At a level of 49.6 in June, up marginally from a revised figure of 49.5 in May, the Composite New Business Index indicated a decline in overall private sector demand for the third consecutive month. The latest marginal decline in new business signalled by the index largely reflected a further sharp contraction in new orders to Eurozone manufacturers in June. Service providers, in contrast, continued to record modest overall growth of new business.

• June's survey pointed to a further sharp rise in average input prices. The Composite Prices Index recorded 55.9, down only marginally from a revised figure of 56.1 the previous month, reflecting continued growth of both manufacturing and, in particular, service sector costs. While manufacturing input price inflation remained only marginal, however, and the lowest for two years, costs in the service sector continued to rise much more sharply - driven principally by strong growth of wages and salaries and rising transport costs.

• The Composite Employment Index remained above the no change mark of 50.0 in June to signal further growth of private sector employment. Nevertheless, having risen slightly in May, the index fell to 51.8 in June to indicate an easing in the overall rate of growth of employment to the weakest since January 1999. Although the service sector workforce continued to record robust growth, June saw a marginal fall in manufacturing employment within the Eurozone for the first time since May 1999.

The four Services Indices show services growth enjoying a modest rise in June, although confidence slips to a new survey low …

• The Services Business Activity Index rose from 52.2 in May to 52.9 in June. Although signalling the first improvement in the rate of growth since the peak recorded in April 2000, the rate of expansion in June was only modestly higher than the three-year survey low seen in May. A marginal increase in the rate of contraction of the German services sector was offset by slightly faster growth in the other Eurozone economies. Italy recorded the strongest growth, followed by France. However, in all countries growth in June remained below that seen throughout much of last year.

• A modest pick up in the rate of growth of demand for services was recorded in June. The New Business Index rose slightly for the second consecutive month to 51.6. Despite the rise, the index remained only moderately higher than the 50.0 no change mark to signal only subdued growth of demand and the third-weakest monthly rise in new business in the survey history. Falling demand for services in Germany contrasted with a reported strengthening of demand in Italy, France and Ireland.

• The Outstanding Business Index remained above the 50.0 no change level in June to register a rise in backlogs of work. However, at 50.2, the increase signalled by the index was only marginal and indicative of few capacity constraints.

• Employment growth eased slightly in June, but the rate of increase remained above the survey low recorded in April. The Employment Index registered 53.3, down from 53.7 in May. By far the strongest growth was recorded in France, followed by Italy. In contrast, a contraction of employment was seen in Germany.

• The rate of growth of input prices remained unchanged in June. Although continuing to rise at a significant pace (driven primarily by rising wages and salaries, high oil prices and costlier imports arising from the Euro's weakness), the rate of increase remained below that seen throughout 2000. Charges for services also rose at a similar rate to the modest pace seen in May (a pace also below that seen throughout 2000). Once again, competition tempered firms' abilities to pass higher costs on to customers.

• Business expectations regarding service providers' activity levels in twelve months' time fell to a new survey low in June, falling well below the average seen throughout 2000. Confidence varied markedly by country, with Germany remaining by far the least optimistic about the year ahead and Italy the most optimistic.

News source: Reuters Eurozone Composite Index