Confectionary items are seen displayed inside a Leysieffer store in Berlin. The eurozone’s Christmas shopping season was a disappointment in December as demand for retail goods fell sharply.

Reuters/London


The eurozone’s private sector logged its busiest month in 2-1/2 years in January but firms slashed prices, which could fan fears of deflation before a policy decision from the European Central Bank, surveys showed yesterday.
The now 18-member currency union’s economic recovery appears broad-based, with Germany leading an upswing in periphery members and signals of a stabilisation in France, the euro area’s second-biggest economy.
Buoyant manufacturing growth, which tends to lead recoveries, outshone a more modest expansion in services activity, which makes up a larger share of the overall economy.
The German economy, the euro zone’s largest, has been a bastion of strength throughout the bloc’s debt crisis and recession. Economists expect German growth, which slowed to 0.4% last year, to pick up to around 1.7% in 2014.
But Markit economist Oliver Kolodseike said services output growth eased to a three-month low.
“New order growth in the service sector inched down to a near-stagnant pace in January, with anecdotal evidence suggesting that some clients hesitated to release their budgets on time,” he said.
“Nevertheless, companies felt confident about their business outlook, resulting in further job creation.”
Business expectations among service providers rose to their highest level in more than 2-1/2 years, in line with recent sentiment surveys that have shown the mood among German consumers, companies and investors surging to multi-year highs.
Spain’s service industry grew at the fastest rate in 6-1/2 years last month, adding to signs its economy has turned a corner, and while Italy’s service sector shrank for the third month running it was closer to growth than expected.
But worryingly for policymakers at the ECB, which is expected to leave policy unchanged when it meets today, firms cut prices for the 22nd month in a row, showing very little in the way of pricing power.
“I can’t say that deflation is a likely prospect, but it’s a bigger risk than it was just two months ago. It will highlight the pressure on the ECB at a time when it is already concerned about disinflation,” said Peter Dixon at Commerzbank.
“It’s possibly another piece of the jigsaw that says a rate cut, if not tomorrow then probably next month.”
The eurozone’s Christmas shopping season was also a disappointment in December as demand for retail goods fell sharply despite expectations of a rise, adding to the risk of deflation for the currency bloc.
Inflation fell well below the ECB’s target of just below 2% in January to just 0.7% and the latest PMI data will do little to allay fears.
More expensive energy made eurozone producer prices rise more than expected in December on the month before, data showed on Tuesday, but prices still fell on a year ago, again pointing to risks that the ECB will have to address.
In contrast, a Markit survey of British firms showed a pick-up in price pressures for service businesses, although not to a level that would suggest a problem for the Bank of England, which has stressed it is in no hurry to raise rates.
Growth in Britain’s dominant service sector slowed unexpectedly in January but activity remained strong, suggesting the economy is picking up speed in the first-quarter of 2014.
Markit’s Eurozone Composite Purchasing Managers’ Index (PMI), which gauges business activity across thousands of companies and is seen as a good guide to economic health, climbed to 52.9 in January from 52.1 the previous month.
It was the highest final reading since June 2011 and was comfortably above the 50 mark that separates growth from contraction, although it was shy of the flash reading of 53.2 reported in late January. “The overall picture depicted by survey indicators remains rather encouraging, with signs of improvement emerging from different points of the economy,” said Annalisa Piazza at Newedge Strategy.
A PMI covering services businesses, which make up the bulk of the bloc’s economy, rose to a four-month high of 51.6 from 51.0, below a flash reading of 51.9. Data on Monday showed factories had their best month since mid-2011.
Services firms found new orders trickling in slower than in December. The related sub-index dropped to 50.8 from 51.4, weaker than the flash reading of 51.0, and suggesting little uptick in the headline number this month.
France’s service sector shrank again in January, albeit at a slower pace than in December, adding to pressure on the government as it tries to engineer an economic recovery.
Markit said its purchasing managers index for services rose in January to 48.9 from 47.8 in December, beating a preliminary reading of 48.6. It was the highest reading since October and brought the index back towards the 50-point threshold dividing expansions in activity from contractions.
Markit economist Jack Kennedy said that although the rate of contraction eased and the flow of new orders improved, the service sector, which generates 56% of French economic output, remained weak.