Business activity in the euro zone expanded at an accelerated
pace at the start of the second quarter, but companies cut the
prices they charged customers, a closely watched business survey
showed, a sign that the European Central Bank's worries over low
inflation are far from over.
The ECB is prepared to act on interest rates or other stimulus
measures if inflation undershoots the central bank's forecasts, ECB
board member Ardo Hansson, who heads Estonia's central bank, said
in an interview with The Wall Street Journal Wednesday.
Data firm Markit's survey of 5,000 manufacturing and services
businesses found that activity expanded again in April, and at the
fastest pace since May 2011. The composite Purchasing Managers
Index--a gauge of activity across the manufacturing and services
sectors--rose to 54.0 from 53.1 in March. A reading above 50
indicates month-to-month expansion in activity.
The business surveys add to recent evidence that the currency
area's return to growth, which started in the second quarter of
2013, is gaining some momentum. A survey released by the European
Commission on Tuesday found that consumer confidence was at its
highest since October 2007 in April, while recent data releases
have pointed to rises in retail sales, industrial production,
exports and construction.
However, the business surveys carried a warning for the ECB,
with manufacturers and services providers reporting that they cut
their prices in April at the fastest pace since August 2013.
"There will be growing fears that deflationary pressures are
intensifying and that the ECB needs to respond with more than just
words to the recent appreciation of the exchange rate," said Chris
Williamson, Markit's chief economist.
Mr. Hansson played down the risks of deflation. "It would mean a
situation of widespread decreases of prices in several countries
and industries. This scenario is difficult to imagine," he said.
Still, he said the ECB has a number of options at its
disposal--including lower interest rates, long-term loans to banks
and asset purchases--if inflation falls short of the central bank's
forecasts.
The PMI survey suggests that the currency area's economy is
growing too slowly to quickly return the inflation rate to the
ECB's target of just below 2%. The ECB's governing council has
accepted that inflation will be below target through 2016, but
policy makers also believe that the 0.5% annual rate of inflation
recorded in March was a low point.
But while April may see a pickup in the rate of inflation, weak
growth and subdued wages could keep it low for a sustained period,
while an appreciating euro also limits price rises. Low rates of
inflation make it more difficult for governments and households to
pay down their debts, which would be a particular problem in
southern Europe.
The European Union's statistics agency Wednesday said the
combined debt of the euro zone's 18 governments rose to 92.6% of
gross domestic product in 2013, the highest level since records
began in 1995. Governments did manage to cut their new borrowing in
2013, recording a combined budget deficit of 3% of GDP, the
smallest since the financial crisis began in 2008.
However, the rise in government debt in the bloc's southern
fringe was larger than the average, since Germany managed to cut
its government debt to 78.4% of GDP from 81% in 2012.
Greece's government debt soared to 175% of annual economic
output from 157.2% in 2012, while Portugal's government debt rose
to 129% from 124.1%, and Spain's rose to 93.9% from 86%.
The purchasing manager surveys, which come on the heels of the
rise in consumer confidence, challenge assertions made by many
economists and the International Monetary Fund that weak
consumer-price pressures threaten the euro bloc's yearlong economic
recovery.
Although low inflation makes it more difficult to repay large
debts, there is an upside, too, that is reflected in recent
economic reports. When food and energy prices soften, households
have more disposable income to spend.
Low inflation may also reflect improved competitiveness in
southern Europe, as businesses keep costs and prices down,
economists said.
"It isn't a source of concern," said Jörg Krämer, chief
economist at Commerzbank. "You may even say this is good deflation
as it goes hand in hand with a recovery in profit margins," he
said, noting that asset prices such as equities and bonds in much
of Europe have risen, not fallen.
Wednesday's PMI report supports that view. Euro-zone members
outside of France and Germany, many of which have seen stagnant or
falling consumer prices, saw their sharpest rise in output in more
than three years.
Markit's survey found that businesses hired additional workers
for only the second month since 2011, and at the fastest pace since
September of that year. If sustained, that would start to cut into
the euro zone's very high unemployment rate, and eventually
translate into higher wages, which should generate inflationary
pressures.
Liis Kangsepp contributed to this article
Write to Paul Hannon at paul.hannon@wsj.com and Brian Blackstone
at brian.blackstone@wsj.com
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