Euro Area Gears for Growth as Companies Look Past Political Woes

(Bloomberg) -- The euro-area economy expanded at the fastest pace this year in November as companies took on workers and kept political concerns at bay.

A Purchasing Managers’ Index for manufacturing and services rose to 53.9 from 53.3 a month earlier, IHS Markit said on Monday. While that’s slightly below a previous estimate of 54.1, it still marks the highest level in 11 months. Italian business activity grew at the fastest rate in nine months, even amid concern over a Dec. 4 referendum that could hit political stability.

“Rather than fretting about political risk, companies appear to be gearing up for further expansion. Employment is rising at one of the fastest rates seen over the past five years,” said Chris Williamson, chief economist at Markit. “The weaker euro appears to be feeding through to faster export-led manufacturing growth, though service-sector companies are also enjoying stronger expansion, suggesting that domestic demand is also improving.”

The upbeat report may reassure the European Central Bank when it meets this week to discuss the euro-area outlook and the fate of its 1.7 trillion-euro ($1.8 trillion) asset-purchase program. Still, ECB President Mario Draghi has repeatedly said the recovery remains reliant on continued monetary support and Markit expects quantitative easing will be prolonged.

The ECB’s judgment will have to take into account the region’s latest political developments, which saw Italian Prime Minister Matteo Renzi resign after a crushing defeat over his constitutional referendum on Sunday. The euro weakened and Italian bond yields rose.

The premier was due to hand in his resignation to President Sergio Mattarellaon Monday afternoon, after Renzi’s proposal to rein in the power of the senate was rejected in a referendum by 60 percent to 40 percent, with almost all votes counted. Renzi signaled that he won’t stay on to help stabilize a caretaker administration.

“The signs of steady fourth-quarter growth and indications that inflationary pressures are rising will be unlikely to deter the ECB from extending its QE program,” Williamson said. “But the extent to which the euro zone is benefiting from the weaker euro in particular, if sustained, will raise the likelihood of stimulus being tapered earlier than previously anticipated.”

The euro-area services PMI was 53.8 in November, below a flash reading of 54.1 but up from 52.8 in October.

Overall euro-area growth was led by Ireland, Spain and Germany, Markit said. The gauge for France was the weakest since July as its manufacturing sector slowed.