Private businesses start 2016 on weak footing

FEB 3, 20169:11 PM

[LONDON] The private sector began 2016 on a slightly weak note around the world, and with scant signs of inflation picking up, pressure will remain on central banks to keep or even ease their already ultra-loose monetary policies, surveys showed on Wednesday.

While eurozone businesses started the year in slightly better shape than first thought, this was partly due to firms cutting prices at the steepest rate since March.

In China, where Beijing is trying to rebalance the world's second-largest economy, activity in the services sector expanded at its fastest pace in six months, partially offsetting weakness in the vast manufacturing industry.

Worries about China's impact on the global economy have hammered stocks and commodities this year, although Britain's huge services sector appeared to have escaped largely unscathed.

Comparable data on the US economy is due out at 1445 GMT. "If external concerns grow and some of those downside risks with respect to China crystallise, then the situation for this year looks pretty bad," said Ben May at Oxford Economics. "But equally, if in a couple of month's time people are less concerned about China, there are tentative signs of export growth picking up, then it may well be the outlook is much brighter." Markit said its latest Purchasing Managers Indexes suggested a quarterly 0.4 per cent growth pace for the euro zone, a rate it has struggled to beat for a long time.

The final Composite PMI, an indicator of overall growth in the private sector, at 53.6 just pipped a flash estimate of 53.5 but was below December's 54.3.

The pace of expansion matched only the weakest rate clocked over the past year and comes as the European Central Bank battles to push inflation, at a feeble 0.4 per cent, back towards its 2 per cent target. "It is worth highlighting that despite this correction, new orders remained at elevated levels, close to multi-year highs, and thus suggesting that the moderate growth momentum is likely to be sustained in Q1," said economist Apolline Menut at Barclays Capital. "Deflationary pressures intensified, as lower oil prices impacted both input and output costs, consistent with our view that the moderate euro area recovery will continue to take place in a 'missingflation environment'." Growth in Germany, Europe's largest economy, slowed but remained relatively solid, while in euro zone No. 2 economy France which has been struggling to produce much growth of late, services businesses perked up a bit.

In one bright spot, retail sales across the 19 countries using the euro increased in December thanks as sales of food, drinks and tobacco rose over the Christmas period, according to official data released on Wednesday.

The Caixin/Markit Purchasing Managers' Index rose to 52.4 in January from a 17-month low of 50.2 in December, but overall prices charged hovered in deflationary territory for a fifth consecutive month.

China's leaders have flagged a "new normal" of slower growth as they look to shift the economy to a more sustainable, consumption-led model. He Fan, chief economist at Caixin Insight Group, said the fast expansion of the services sector indicated a better economic structure. "The government should continue to deepen reform, relax administrative controls and reduce restrictions on market entry for service providers," He said. "This will release the potential of the services sector." Services growth likely slowed in the United States, the world's largest economy, after the Federal Reserve raised interest rates for the first time in nearly a decade at the end of last year.

Britain's huge services sector appeared to have performed better despite a tough January on financial markets, although firms were concerned about risks ahead, including a referendum on European Union membership.

The Markit/CIPS services PMI for Britain, which doesn't use the euro, edged up to 55.6, a level it has surpassed only once since last July.

The sign Britain's economy started 2016 strongly will be certainly be noted by the Bank of England.

According to the latest Reuters poll, its Bank Rate, which has sat at a record low of 0.5 per cent since early 2009, probably won't rise until Octobers at the earliest - and even then by only 25 basis points.

Sterling markets don't expect a rate rise until 2018. "There are some reasons to be cautious. In particular, there is clearly some scope for the economy to be hit by uncertainty ahead of the EU referendum," said Vicky Redwood at Capital Economics.

Prime Minister David Cameron has promised a vote on whether Britain stays or leaves the EU under a "Brexit" scenario. Reuters polls have consistently shown that uncertainty over the outcome is seen as the biggest threat to the economy.

As the ECB fights its own threats, it is widely expected to ease policy again next month, pushing its deposit rate even deeper into negative territory. There is also an even chance it will increase the 60 billion euros a month it currently spends buying bonds, a Reuters poll found.

Markit's euro zone output prices index fell further below the breakeven 50 mark to a 10-month low, underscoring the ECB's inflation dilemma.

However, the prospect of yet more stimulus from the ECB meant firms were at their most optimistic about the upcoming year since mid-2011.

REUTERS