Market News

BY Indradip Ghosh

(Reuters) -Euro zone business growth remained weak in March despite expanding at its fastest pace in seven months supported by an easing in the long-running manufacturing downturn but held back by slower growth in services, a survey showed.

The slight improvement in the common currency bloc's business climate could gain more traction over the coming months as plans for a spending splurge in infrastructure and defence, particularly in Germany, raise optimism for a turnaround in Europe's economic fortunes.

HCOB's preliminary composite euro zone Purchasing Managers' Index, compiled by S&P Global, rose to 50.4 this month from February's 50.2, its highest since August. It has remained above the 50 mark separating growth from contraction since the start of this year.

Growth in activity was still meagre, however, and the index was below a prediction in a Reuters poll for a rise to 50.8.

"The March PMI shows cautious further improvement...the manufacturing output PMI soared ahead of a possible further escalation of the trade war. For the first quarter, this means that a positive GDP growth print is likely after stagnation at the end of last year," said Bert Colijn, chief economist at ING.

"Expectations of significant defence and infrastructure investment help optimism about a more sustained recovery – especially in Germany, where the manufacturing PMI soared – but export orders could remain under pressure given the trade war and global sluggish demand."

Business activity in Germany, Europe's largest economy, expanded at its sharpest pace in 10 months due to the first increase in manufacturing production in nearly two years. However, activity in the services sector lost momentum.

In France, the bloc's second-biggest economy, activity contracted for a seventh consecutive month as business confidence fell to its lowest level since April 2020.

Meanwhile in Britain, outside the European Union, the composite PMI hit a six-month high as a pick-up in services growth offset manufacturing's persistent contraction.

That will offer some comfort to finance minister Rachel Reeves ahead of a challenging speech on the economy and the public finances this week.

EURO ZONE GROWTH IMPROVING

An index measuring the bloc's dominant services industry declined to 50.4 from last month's 50.6, below the Reuters poll forecast of 51.0.

But a nearly three-year contraction in manufacturing eased and its headline PMI increased to an over two-year high of 48.7 from 47.6 in February. The Reuters poll had predicted it at 48.2.

An index measuring factory output that feeds into the composite PMI showed expansion for the first time in two years. It jumped to 50.7 from 48.9, its highest since May 2022.

Faced with higher costs, manufacturing firms raised prices charged. Both input and output inflation hit their highest in seven months. However, prices grew at a slower pace in the services sector.

In a sign of improving sentiment among businesses, employment generation gathered pace this month. The composite employment index rose to 50.1 from 49.2, above breakeven for the first time in eight months.

(Reporting by Indradip Ghosh; Editing by Toby Chopra and Hugh Lawson)