Eurozone businesses report strongest activity since 2011

The eurozone’s services sector ended the year at its healthiest level since the before the depths its debt crisis, according to a closely-watched series of surveys which point to a further acceleration in the region’s economic growth.

December’s services purchasing managers’ index hit 56.6, its highest level since early 2011, with businesses reporting the fastest increase in new work for more than a decade.

The figure – well above the 50 level that indicates growth – marked a slight increase on a flash reading released last month. Signs of strength in the key sector – which accounts for almost three quarters of economic activity in the eurozone – follows confirmation earlier this week that the manufacturing PMI had hit its highest level on record, and provides further evidence the currency area’s economy is in rude health.

The composite PMI – IHS Markit’s broadest gauge of economic performance – increased from 57.5 to 58.1, its highest level since February 2011. The PMI surveys question hundreds of firms on measures such as inventory growth and employment changes, and are used by economists and policymakers including the European Central Bank as early indicators of economic growth.

December’s figures point to an acceleration in quarterly GDP growth to 0.8 per cent in the fourth quarter, and IHS Markit chief business economist Chris Williamson said there was “no sign of momentum being lost as we move into 2018″.

“While the momentum is likely to fade somewhat this year, the overall level of activity should remain well above its long term potential as the recovery continues,” said Julien Lafargue, European equities strategist at JPMorgan Private Bank

Mr Williamson added:

A stellar end to 2017 for the eurozone rounded off the best year for over a decade, continuing to confound widely-held fears that rising political uncertainty would curb economic growth.

Based on past experience, the extent to which demand appears to be outstripping supply for many goods and services suggests that inflationary pressures could continue to build in the coming months. A big question for 2018 will therefore be whether relatively high unemployment and spare capacity in many countries will continue to hold down pay growth and keep a ceiling on consumer price inflation; a reminder that many wounds from the global financial crisis and the region’s sovereign debt crisis are still healing.

Italian services businesses reported a particularly marked improvement, with a reading of 55.4 up from 54.7 the previous month. Consensus forecasts had predicted no change. However, there was some negativity with signs that companies were unwilling to pass on higher costs to customers, eating into margins, and business optimism declined.

Growth in France’s services sector appeared a little slower compared to November’s six and a half year high, but survey respondents remained more confident than usual. In Germany, the services measure hit a two year high after lagging somewhat behind its booming manufacturing sector for much of the year.