Euro zone business growth stabilises but euro a rising concern

By Jonathan Cable

LONDON (Reuters) - Business activity across the euro zone was still growing as the second quarter began, but at a more modest rate than around the turn of the year, a survey showed on Monday.

The euro zone unexpectedly was one of the best-performing major economies last year. But after peaking in January, growth has steadily slowed on a strong currency and fears a trade spat between China and the United States could start to hurt.

IHS Markit's composite flash Purchasing Managers' Index (PMI) for the euro zone, seen as a good guide to overall economic health, held steady in April at March's 14-month low of 55.2, defying a Reuters poll forecast for a fall to 54.9.

Germany and France, the bloc's two biggest economies and the only ones to publish flash readings, showed improvement, suggesting growth must have slowed in other big economies.

Still, survey compiler IHS Markit said the PMI pointed to solid quarterly GDP growth of 0.6 percent, matching the consensus view in the latest Reuters poll. [ECILT/EU]

"This suggests that the strength of the euro, a possible fading boost from ECB policy, and concerns about protectionism have not done serious damage to the economy," noted Jack Allen at Capital Economics.

The European Central Bank will end its asset purchase programme this year and hike interest rates in 2019, a Reuters poll found this month, although policymakers may be concerned to see inflationary pressures easing alongside weakening growth.

Amid talk policymakers feel it is still too early to announce a timetable for winding down its bond buying, the ECB's rate-setting Governing Council meets on Thursday.

ECB chief Mario Draghi said last week he was confident the inflation outlook has picked up, but uncertainties "warrant patience, persistence and prudence."

Inflation in the bloc was just 1.3 percent in March, a long way from the ECB's target of just under 2 percent. This month, the output prices component of the PMI fell to 53.2 from 53.5.

That easing price pressure helped the PMI covering the euro zone's dominant services industry to confound expectations and nudge up to 55.0 from 54.9 in March. The forecast was 54.6.

To meet still-strong demand, firms took on staff at the fastest rate since the tail-end of 2007. The employment sub-index jumped to 55.0 from 54.1.

Manufacturing growth waned in April, however, with the factory PMI falling to a 14-month low of 56.0 from 56.6, just shy of a median forecast for 56.1.

An index measuring output which feeds into the composite PMI dipped to a 17-month low of 55.8 from 55.9.

Factories are bearing the brunt of a strong euro, up around 2 percent against the dollar so far this year and expected to strengthen further. New export order growth dwindled.

That sub-index, which includes trade between member countries, fell to 53.7 from 54.8, an 18-month low.

"The effects of the stronger euro are playing an important role here as new orders from outside the euro zone slowed as well," said Bert Colijn at ING.

(Editing by Toby Chopra)