Eurozone Economy Strengthens on Service-Sector Surge

Eurozone economic growth continued to pick up in March, driven exclusively by the service sector, as concerns over energy supplies recede.

The overall rate of expansion rose to the highest level in 10 months, according to business surveys by S&P Global. Manufacturing output broadly stagnated, however—supported only by a backlog of orders as demand continued to fall.

“Growth has been buoyed since the lows of late last year, as recession fears and energy market worries fade, inflation pressures ease, and the unprecedented supply-chain delays seen during the pandemic are replaced with record improvements to supplier delivery times,” said Chris Williamson, an economist at S&P Global.

Sentiment in Europe began improving as it became clear that the region would avoid worst-case scenarios for access to natural gas predicted after Russia cut off supplies to the bloc. Recent turmoil in the banking sector has cast some doubt on how the global economy will develop, though European officials have sounded confident that the sector can withstand any fallout.

While activity improved in both Germany and France, the strongest performance came in the rest of the 20-nation Eurozone.

What Bloomberg Economists Say…

“The euro-area composite PMI survey for March suggests the economy is beginning to emerge from a period of stagnation and holding up well under the weight of higher interest rates. While monetary policy works with variable lags, and choppy waters may still lie ahead, the resilience of the economy should allow the hawks at the European Central Bank to succeed in pushing for more interest rate increases.”

—David Powell, economist

Inflation is still running far above the European Central Bank’s (ECB’s) 2 percent target, however, with underlying data becoming the key focus for policymakers. While price gains continued to moderate in March, they remain elevated by historical standards, according to S&P Global.

“Such stubborn inflationary pressures, fueled primarily by the service sector and rising wage costs, will be a concern to policymakers and suggest that more work may be needed in terms of bringing inflation down to target,” Williamson said.

The jobs market also remained resilient. Employment growth reached a nine-month high, with acceleration seen especially in services, in line with rising demand.

Firms’ confidence in the business outlook dipped, though it remained well above levels seen in late 2022. That could be linked to concerns over uncertainty caused by banking-sector stress and the impact of further increases in interest rates, S&P Global said.

The composite PMI reading for the UK edged lower to 52.2 in March, from 53.1 the previous month, suggesting the economy has avoided a recession for now. British companies are the most confident they’ve been since the start of Russia’s invasion of Ukraine.

Data earlier revealed that activity in Japan’s services sector edged up to the strongest in almost a decade as the return of Chinese tourists boosted demand.

—With assistance from Mark Evans, Joel Rinneby, Tom Rees & Zoe Schneeweiss.

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