Cautious consumers keep lid on business growth

[June 03, 2016]  By Jonathan Cable

LONDON (Reuters) - Business growth across the euro zone remained muted in May, providing the latest evidence the relatively strong expansion at the start of the year has already lost momentum, a survey showed on Friday.

Also of concern to policymakers at the European Central Bank, who left their ultra-loose monetary policy unchanged on Thursday, companies were still cutting prices in May, as they have done for most of the past five years.

The ECB nudged up its 2016 growth and inflation forecasts this week, arguing the risks facing the economy had declined and supporting expectations it would keep further stimulus under wraps at least until the autumn.

Yet Markit said its composite Purchasing Managers' Index (PMI) for the euro zone, which nudged up to 53.1 in May, signaled a GDP rise of 0.3 percent in the second quarter, down sharply from 0.5 percent January-March. [ECILT/EU]

Meanwhile euro zone retail sales, a proxy for household spending, were reported flat in April on the month before, despite market expectations of a more robust rebound after dropping in March.

"Consumer spending is set to slow this year because of the fading effects of falling oil prices," said Stephen Brown at Capital Economics. "It is a little disappointing - overall the data does point to growth slowing."

The slowdown comes despite mass price discounting for goods and services, a trend the ECB is keen to reverse. A sub-index measuring prices charged held stubbornly below the 50 mark that separates growth from contraction.

Years of loose monetary policy have failed to get inflation anywhere near the ECB's 2 percent target ceiling. Inflation was -0.1 percent last month, official data showed.

Across the currency union, results were mixed, providing some glimmers of optimism but also highlighting areas of concern.

Growth picked up in Germany and France, the bloc's two biggest economies, and remained resilient in Spain and Ireland. But expansion slumped in Italy to near-stagnation.

Outside the bloc, British services activity accelerated in May after dropping to a three-year low in April, but the approach of the country's referendum on European Union membership weighed on new business and hiring.

People walk through the Mall of Berlin shopping centre during its opening night in Berlin, Germany, in this September 24, 2014 file picture. REUTERS/Thomas Peter/File Photo

The UK services PMI rose to 53.5 in May from 52.3 in April. That was stronger than the median forecast of 52.5 in a Reuters poll but still one of the weakest readings in three years.

In a stronger outlook than last month, Markit said Britain's economy looks set to grow 0.2 percent in the second quarter, a slowdown from 0.4 percent in the first three months of 2016. A Reuters poll predicted 0.4 percent growth. [ECILT/GB]

One in three companies reported suffering from uncertainty created by Britain's June 23 referendum on whether to remain a member of the EU.

"Should the UK vote to remain in the EU, we expect a rebound in activity," said James Smith at ING.

(Additional reporting by William Schomberg; Editing by Toby Chopra)

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