Eurozone Service Sector Moves Into Expansion … By a Whisker!

06 August 2003

Economic contraction eases to near stagnation in July; loss of new business decelerates sharply.

The July Reuters Eurozone Service Sector Business Activity Index moved above the 50.0 level (separating contraction from expansion) for the first time this year. These are the key findings for July 2003:

Business Activity Index
While still low compared to readings seen in the first half of last year, this index suggests a marked improvement in service sector business conditions in recent months. It has risen from a seventeen-month low of 47.7 in April to a seven-month high in July as firms reported a recovery both of business and consumer confidence following the end of the war on Iraq.

Business Expectations Index
Business confidence improved for the second month running in July. The index, which measures optimism regarding business activity over the coming twelve months, rose to the highest level since August 2002. The greatest optimism was seen in Spain, followed closely by Italy. Even Germany saw the number of optimists exceed pessimists.

Incoming New Business Index
This rose sharply in July. At 49.9, up from 46.5 in June, the index registered a very marginal decline in new business, but this contrasts with significantly steeper falls in previous months. Only Germany saw a fall in new business, and even here the rate of contraction slowed to the weakest since last August.

Average Input Prices Index
This rose from 50.2 in June to 52.9 in July, indicating the fastest growth of costs for three months. However, the rate of increase remained only modest by historical standards of the survey, attributed mainly to the weakening of oil and fuel prices from highs earlier in the year. Companies also reported that the strength of the euro against the dollar continued to restrain overall growth of costs by reducing prices of goods and services bought from outside the euro area, though to a lesser extent than in June. Improved business and consumer confidence was reported, as well as an easing in the rate of loss of exports.

Employment Index
Despite the rises in the business activity and new orders indices, employment in the Eurozone service sector continued to fall at a steep rate in July. The index dropped slightly from 45.9 in June to 45.8, signalling a rate of decline only marginally less severe than the five-year survey record pace seen in January. Employment has now fallen for twelve consecutive months. However, the drop in July was the smallest recorded for five months.

The data are based on the results of surveys carried out in Germany, France, Spain, Italy, Austria, Ireland, Greece and the Netherlands (plus UK for the EU data), covering over 5,500 manufacturing and services companies. These countries together account for an estimated 92% of total Eurozone gross domestic product. Questions are asked about real events and are not opinion based.

Data sourced from: NTC Research; additional content by WARC staff