Euro zone private sector booms but so do prices

Activity in the euro zone's private sector grew faster than expected this month, particularly in the bloc's factories, but the upturn is driving prices higher, business surveys showed on Monday.

Markit's Flash Eurozone Manufacturing PMI leapt to a near 11-year high of 59.0 from 57.3 in January, beating expectations for 57.3. The output index rose to 61.1 from last month's 59.4, its highest since April 2010.

The flash euro zone services PMI, which measures activity in companies ranging from banks to hotels, rose to 57.2 from 55.9 in January, its highest reading since August 2007 and marking its 18th month above the 50 mark that divides growth from contraction.

Economists had predicted only a slight uptick to 56.0. The closely-watched Ifo survey of German business morale was similarly above forecast.

The data underpins the resilience of the euro area business cycle. It's clearly an indication that the economy is doing well, said Silvio Peruzzo at RBS.

Worryingly, however, for policymakers concerned about inflation, the costs of raw materials and energy soared at their fastest pace in the survey's near 14-year history. The factory input price indicator jumped to 85.7 this month from 79.2 in January.

The output price index also climbed to a survey high, suggesting firms were passing on some of the increases to customers.

The focus of the market will be shifting more to price developments and the numbers are quite worrying, said Ken Wattret at BNP Paribas.

The European Central Bank has expressed its anxiety about pass-through effects from commodity prices and the PMI data is suggesting that those effects are building.

Comments from several ECB policymakers on Monday underlined the growing concern over inflation, with Executive Board member Lorenzo Bini Smaghi warning that rises in food and fuel prices could prove to be a permanent phenomenon.

Euro zone inflation jumped more than expected to 2.4 percent in January, above the ECB's two-percent target ceiling.

DIVERGENCE DIMINISHES

A flash reading earlier from China showed its manufacturing sector was knocked by a steady ratcheting up of monetary tightening and a Luna New Year holiday with growth at a 7-month low this month.

Firms hired workers at a faster pace, reversing a recent trend, with the composite employment index rising to 52.8 from January's 52.1.

With Asia slowing down -- as confirmed by the sharp drop in today's flash China February manufacturing PMI -- and fiscal austerity increasingly kicking in, the underlying pace of growth is likely to settle down somewhat going forward, said Martin van Vliet at ING.

Germany continued to lead the way in Europe while France saw an upturn while peripheral members that had been languishing in a downturn also saw an upswing.

Earlier data from Germany showed its services PMI dipped to 59.5 this month from January's 60.3 but the pace of growth in its manufacturing sector picked up speed, with the PMI for that sector rising to the highest in the survey's 15-year history.

German business sentiment improved for the ninth month in a row in February, the Ifo think tank said.

France and Germany's differential is narrowing in terms of output but also the differential with the rest of the euro zone is narrowing as well. Manufacturing outside of France and Germany is positively surging now, Markit's Chris Williamson said.

The euro zone composite index, compiled from the services and manufacturing sectors and often used to predict overall growth, bounced to 58.4 this month from 57.0 in January, smashing expectations for 56.9 and notching up its highest reading since July 2006.

The numbers, if little changed next month, are in line with first quarter growth of around 0.7 percent, Markit said.

The bloc's economy grew 0.3 percent in the final three months of 2010 and economists polled by Reuters do not expect a strong pick up anytime soon..

Data released earlier this month showed unemployment in the euro zone held steady at 10.0 percent in December, hovering near a 12-year high.

The outlook for the dominant service sector is improving with the new business index rising to 56.4 this month from January's 55.9, its highest level since August 2007.