Eurozone businesses had a much poorer start to 2016 than expected as deeper price cutting and a weak euro making goods and services cheaper abroad failed to drive any meaningful demand, a survey showed on Friday. The disappointing survey comes a day after the European Central Bank left policy unchanged, having cut its deposit rate and extended an asset-buying programme last month.
"Under normal conditions you would expect discounting and all this stimulus to stimulate stronger growth but it is coming with a backdrop where many parts of the world are seeing slower growth," said Rob Dobson, senior economist at Markit. "You can put a lot of stimulus into the market but if the rest of the world is slowing then it is difficult to buck that trend."
ECB President Mario Draghi held out the prospect of further loosening in March, telling reporters after Thursday's policy decision the Bank expected rates to "stay at present or lower levels for an extended period of time". Markit's Composite Flash Purchasing Managers' Index (PMI) for the euro zone, based on surveys of thousands of companies and seen as a good guide to growth, slumped to an 11-month low of 53.5 from December's 54.3.
That is likely to amplify calls for more policy easing to boost growth and inflation as it was below all forecasts in a Reuters poll which had suggested a modest dip to 54.2. The index has been above the 50 mark that separates growth from contraction since July 2013.
Dobson said if similar readings are maintained the PMI points to economic growth of 0.3-0.4 percent in the current quarter, in line with the 0.4 percent forecast in a Reuters poll published last week. Inflation was just 0.2 percent in December, a fraction of the ECB's 2 percent target ceiling, and firms cut prices at the steepest rate since March. The composite output price index sank to 49.1 from 49.5.
Even with price cutting, growth in the bloc's dominant services industries stuttered. A PMI covering the sector fell to a one year low of 53.6, well below the median expectation for no change from December's 54.2. It was a similar gloomy story for factories - their PMI sank to 52.3 from 53.2, below all forecasts in a Reuters poll and its lowest reading since October. A sub-index measuring output that feeds into the composite PMI tumbled to an 11-month low of 53.2 from 54.5. New orders from abroad for manufactured goods came in at a slower pace than last month - despite the euro remaining weak this year. The sub-index fell to 52.3 from 53.2.
Despite the slowdown in growth and incoming business, services firms expect things to pick up. Their optimism about the future was at its highest level for nearly five years, with the businesses expectations index leaping to 65.2 from 63.3. "We are still seeing many markets increasing employment and backlogs of work are becoming very strong, suggesting companies are seeing that there is reason to be positive," Dobson said.
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