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Euro area survey indexes stay close to three-year high

John Fraher & Catherine Bosley

Growth in euro-area manufacturing and services stayed close to the fastest since 2011 in March as France improved, providing further evidence that the region’s recovery is on track.

Indexes for both industries based on surveys of purchasing managers were little changed from February, London-based Markit Economics Ltd. said in a statement today. A composite gauge slipped to 53.2 from 53.3 in February, matching the median forecast in a Bloomberg News survey of 26 economists. The index has been above 50, indicating expansion, since July.

The report follows European Central Bank Mario Draghi’s prediction that a fledgling recovery from the sovereign debt crisis will gradually gain strength. Risks to that scenario include the euro’s 6.2 percent increase against the dollar in the past year and signs of slowing growth in China.

“The ongoing upturn in business activity in March rounds off the euro zone’s best quarter since the second quarter of 2011,” Chris Williamson, chief economist at Markit, said in a statement.

In China today, another survey showed manufacturing weakened for a fifth straight month, deepening concern the nation will miss its 7.5 percent growth target this year. The Purchasing Managers’ Index from HSBC Holdings Plc and Markit dropped to 48.1, compared with the 48.7 median estimate of 22 analysts surveyed by Bloomberg and February’s final 48.5 figure.

The euro, which has appreciated about 6 percent against the dollar in the past 12 months, traded down 0.2 percent at $1.3770 at 10:45 a.m. in London.

Although the ECB predicts the euro area’s economy will return to full-year growth this year, it is expanding less quickly than other major economies and unemployment remains high. Officials are also gauging the risk that too little inflation might evolve into deflation.

Euro-area inflation unexpectedly slowed in February, meaning the bloc’s inflation rate has been below 1 percent for five months. The ECB aims to keep inflation just below 2 percent.

The PMI report also highlights the risks of falling prices in the euro region, a threat that has prompted Draghi to pledge he will keep interest rates at a record low or lower “for an extended period of time.”

“With prices charged by manufacturers and service providers both falling again in March, there remains an argument for further stimulus, especially if the rate of growth of activity cools again in April,” Markit’s Williamson said.

In France, manufacturing returned to growth for the first time in two years, with an index of factory activity rising to 51.9 in March from 49.7. Manufacturing in Germany slipped to a four-month low of 53.8 from 54.8 in February.

The central bank is expected to keep its benchmark rate at 0.25 percent for a fifth month in April, according to a Bloomberg survey of 41 economists published on March 13.

Analysts are divided as to whether the ECB will act to prevent a rising euro, which Draghi said “might influence our price-stability objective.” Companies such as sportswear maker Adidas AG say the currency’s rise is hurting exports.

“I don’t believe they’re going to do anything on rates,” said Stephen Webster, chief European Economist at 4CAST Ltd. in London. Even though Draghi has said they’re considering other measures, “they’re complicated and take time to implement.”

ECB Governing Council member Erkki Liikanen reiterated today that slack in the euro-area economy means policy makers will keep interest rates low even as growth improves.

“Owing to the high degree of unutilized capacity, ECB interest rates will remain at present or lower levels for an extended period of time, supporting the economy well into the recovery,” Liikanen, who also heads the Bank of Finland, said in an e-mailed report today. “In addition, the Governing Council stands ready to take further decisive action.”

Underscoring the recovery’s uneven pace, German investor confidence suffered its third monthly decline in February. That same month, European car sales rose 7.6 percent, the sixth consecutive monthly gain.

“The European economy will pick up -- it won’t be fast, it’ll be very gradual,” Jean-Paul Chifflet, chief executive officer of Credit Agricole SA, France’s third-largest bank, said last week. “That narrow path is littered with risks, such as deflation.”

Among automakers, Italy’s Fiat SpA Chief Executive Officer Sergio Marchionne said earlier this month business in the U.S. was going well. European losses are likely to narrow this year, he also said.

[Bloomberg]

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