Euro zone business growth hits three-year high but ECB cautious

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Euro Zone Business Growth Hits Three-Year High But Ecb Cautious Euro Zone Business Growth Hits Three-Year High But Ecb Cautious
General view of the European Central Bank in Frankfurt, Germany (John Walton/PA), © PA Archive/PA Images
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Jonathan Cable

Euro zone business growth accelerated at its fastest pace in over three years in May, a survey has showed, but European Central Bank (ECB) president Christine Lagarde said an uncertain recovery still needed emergency support from the bank.

After a slow start to vaccinations, the pace is now picking up, allowing some restrictions to be lifted and a strong resurgence in the bloc's now-reopening service industry added to the impetus from a booming manufacturing sector.

As the economy rebounds and confidence improves, some policymakers are making the case for the ECB to start giving up its emergency measures and revert to more traditional forms of stimulus.

But others are more cautious, warning the fledgling recovery is predicated on copious ECB support and that a recent rise in borrowing costs to two-year highs is already a major drag.

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"We are committed to preserving favourable financing conditions. It's far too early and it's actually unnecessary to debate longer-term issues," Ms Lagarde said.

"I have repeatedly said that policymakers needed to provide the right bridge across the pandemic, well into the recovery, so we can actually deliver on our mandate."

In addition, euro zone finance ministers will continue to support their economies but were upbeat about prospects for the post-pandemic recovery.

Economic health

With more businesses reopening, IHS Markit's flash Composite Purchasing Managers' Index, seen as a good guide to economic health, climbed to 56.9 in May from April's final reading of 53.8.

That was its highest level since February 2018 and comfortably above the 50 mark, separating growth from contraction, as well as the more modest increase to 55.1 predicted in a Reuters poll.

"We don't think today's euro area PMI data will cause the ECB to taper the PEPP next month," said George Buckley at Nomura.

The bloc's economy will expand 1.4 per cent this quarter, according to a Reuters poll last week that also found forecasts for the rest of the year had been downgraded from last month.

"May's increase in the euro zone Composite PMI reflects the further lifting of virus restrictions in many parts of the region and suggests that the economic recovery is now underway," said Jessica Hinds at Capital Economics.

A deal agreed by the EU earlier this week to open up tourism across the 27-nation bloc this summer should also provide a boost to tourism-dependent economies which were hammered by restrictions last year.

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