Euro zone economy stutters as ECB gears up for action

Wed Jun 4, 2014 6:51am EDT
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By Jonathan Cable

LONDON (Reuters) - Price cuts by euro zone firms failed to prevent business growth from losing momentum in May, all but sealing the case for looser monetary policy a day before the European Central Bank meets.

Markit's Composite Purchasing Managers' Index (PMI) showed that while output across the bloc remained solid in May the pace of growth eased - despite output prices falling for the 26th straight month.

"Today's PMIs remain consistent with some recovery in the euro zone," said Annalisa Piazza at Newedge Strategy.

"That said, we rule out that the picture of moderate recovery will be an obstacle for the ECB to justify further accommodation this week."

ECB policymakers have flagged a move at Thursday's meeting. Sources told Reuters last month the bank was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small and mid-sized businesses.

Annual euro zone inflation, which the ECB prefers to be just under 2 percent, fell unexpectedly in May to just 0.5 percent, increasing the risks of deflation and making a policy response on Thursday a virtual certainty.

Industrial producer prices, a proxy for consumer prices, fell as expected both on the month and on a year ago in April, Eurostat also said on Wednesday.

In Britain, which does not use the euro, the services industry expanded faster than expected in May, and hiring notched a 17-year high, adding to a debate at the Bank of England about how soon it should raise rates.   Continued...

The headquarters of the European Central Bank (ECB) are pictured in Frankfurt June 6, 2013.  REUTERS/Ralph Orlowski