DECOUPLING - Europe's Manufacturing, Services Growth Accelerates
By Fergal O'Brien
June 21 (Bloomberg) -- European manufacturing and service industries making up two-thirds of the economy grew at an unexpectedly rapid pace in June as companies hired workers and invested in offices and equipment.
Royal Bank of Scotland Group Plc's combined index, spanning industries from oil and autos to banking and airlines, rose to 57.7 from 56.8. Economists expected a decline to 56.6, according to a Bloomberg News survey. A reading above 50 indicates expansion.
The fastest sustained global economic growth in 30 years has boosted European exports, prompting companies to increase capacity and take on staff. DAF Trucks NV, the Dutch unit of U.S. truckmaker Paccar Inc., is boosting output at its main plant in the Netherlands, and BNP Paribas SA, France's largest lender, said yesterday it plans to add 700 jobs at its investment bank this year. Bond yields rose in the U.S. and Europe today on concern economic growth and inflation are accelerating.
``Growth momentum elsewhere is strong so foreign demand is strong,'' said Marco Valli, an economist at UniCredit MIB in Milan. ``Consumption is still a bit soft, but it is going to strengthen, so the outlook is bright in my view.''
The preliminary index of services growth increased to 58.3 in June from 57.3 in May, while the manufacturing gauge rose to 55.4 from 55.
`Flash' Estimate
It's the first time Royal Bank of Scotland has issued a ``flash'' estimate of the indexes, which are based on surveys of purchasing managers by NTC Economics Ltd. RBS will publish a final manufacturing PMI on July 2 and a final services figure two days later.
The euro was little changed after the report, down 0.1 percent at $1.3385. Bonds fell for a second day on anticipation that today's industry reports and a German confidence index due tomorrow will underpin the case for the European Central Bank to keep lifting interest rates. The yield on the benchmark 10-year German bund rose 2 basis points to 4.66 percent by 11:24 a.m. in Frankfurt. Bond yields move inversely to prices.
The Frankfurt-based ECB has already increased its key lending rate eight times since late 2005.
In the U.S., the yield on the benchmark 10-year note rose 2 basis points to 5.15 percent as economists forecast that the Federal Reserve Bank of Philadelphia survey of manufacturing will indicate the economy is accelerating after barely growing in the first quarter.
Three Times
The euro-area economy expanded 0.6 percent in the first quarter, three times the rate of growth in the U.S., as company investment surged the most in a decade. Unemployment dropped to a record low of 7.1 percent in April and business and consumer confidence reached a six-year high in May.
The Ifo institute's index of sentiment in Germany, Europe's largest economy, probably reached 108.4 in June, according to a Bloomberg survey. That would compare with May's 108.6 reading, the second-highest level since records began in 1991.
The European Commission predicts the euro region's economy will expand 2.6 percent this year, putting it on course to outpace the U.S. for the first time since 2001. The commission expects growth in the world's largest economy to slow to 2.2 percent this year.
The International Monetary Fund forecasts global economic growth of 4.9 percent in 2007 after 5.4 percent expansion last year, extending the longest period that growth rates have held above 4 percent since the early 1970s.
Borrowing Costs
Rising borrowing costs and the strength of the euro may curb the pace of growth in the second half of the year. The euro has risen almost 7 percent against the dollar in the last 12 months, making European exports more expensive abroad.
Manufacturing orders in Germany fell for the first time in three months in April, and French and Italian industrial production both unexpectedly declined. French consumer spending on manufactured goods fell last month, while the ZEW gauge of German investor confidence unexpectedly dropped in June.
The ECB on June 6 raised its key rate to 4 percent and indicated further moves may be in the pipeline as the pace of growth threatens to fuel inflation. The measures of input and output prices in today's composite PMI report both increased.
``This could be of concern to the ECB, which had highlighted the risk of high capacity utilization boosting inflation,'' said Sandra Petcov, an economist at Lehman Brothers in London.
Interest-rate futures show traders are betting the ECB will raise rates at least a quarter-point and that they have increased wagers on a second increase by year end. The implied yield on the December futures contract has risen 24 basis points since the start of May to 4.57 percent.
The contract settles to the three-month interbank offered rate for the euro, which has averaged about 16 basis points above the ECB key rate since 1999.
To contact the reporter on this story: Fergal O'Brien in Dublin at fobrien@bloomberg.net .
Last Updated: June 21, 2007 06:08 EDT
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