Euro zone business activity has seen a much more positive end to the latest quarter according to surveys released on Tuesday, suggesting that the efforts to boost the economy by the European Central Bank are already having an effect.
The Purchasing Manager’s Index (PMI), a measurement complex used by Markit to monitor the rate of growth based on the level of new orders, inventory, production, supplier deliveries and the employment environment, has shown strength at 53.7 in March, indicating growth in the manufacturing sector. Compared monthly, a PMI indicator of more than 50 represents expansion. The PMI in February was at 53. The PMI for the dominant service industry was also good at 54.
Some have attributed the latest growth to the European Central Bank’s stimulus such as, cutting interest rates and increasing its asset purchase program. Interest rates had been further cut to zero and a key deposit rate had been reduced to almost negative, in hopes to further fuel the economy. Low interest rates generally encourage investments and consumption.
Markit’s Chris Williamson said:
“There are some signs that perhaps the stimulus is being perceived by companies as a springboard for better growth coming up in the rest of the year.”
“There is an underbelly of weakness still prevalent in the economy but hopefully the ECB’s extra stimulus should mean that things turn around pretty quickly.”
The European Union is also fighting off deflation, which has already started with a rate of inflation registering at 0.2 per cent in February. Earlier targets were at a positive 2 per cent. This was seen to be an effect of firms having to reduce prices to continue transactions. The output price index has gone up to just 48.6 from 48.5.
As manufacturers do not see any significant increase in activity for April moves to hire additional workers was not taken leading to an almost equal headcount. The employment sub-index reached its lowest since 2014 at 50.5. Low production outlook also lead to a reduction of the backlog work index, going below 50 at 49.8, indicating a contraction.
Interest rates are expected to stay low for a long period of time. The ECB hopes that this will facilitate lending and encourage more economic activity within the 19 country bloc.