European Services Industry Seen Growing for 7th Month (Correct)

(Corrects stock market gain in sixth paragraph.)

Feb. 4 (Bloomberg) -- European services, the largest part of the region's economy, probably expanded for a seventh consecutive month in January as accelerating economic growth spurred demand for travel and banking, a survey of economists showed.

An index based on a survey of 2,000 purchasing managers in the 12 euro nations compiled for Reuters Group Plc by NTC Research Ltd. may have increased to 56.9 from December's 56.6, according to the median forecast of 24 economists surveyed by Bloomberg News. A reading of more than 50 indicates expansion.

``The recovery in the euro region is gathering speed and the services industry is supporting it,'' said Klaus Schruefer, chief asset strategist at SEB AG in Frankfurt, who forecasts Europe's economy may grow 2 percent this year. ``We could see a positive surprise this year if the global economy holds up.''

European companies grew more confident in January for the fifth time in six months, a European Commission survey of 25,000 companies showed Friday. That increased optimism is being reflected in spending on services such as hotels, investment services and phone networks, boosting demand at companies including Deutsche Telekom AG and KLM Royal Dutch Airlines NV.

Deutsche Telekom, Europe's largest phone company, said last week it added 7.6 million new customers at its mobile-phone unit last year. The Bonn, Germany-based company gained 705,000 new subscribers in Germany in the fourth quarter, more than the 449,000 analysts had forecast in a Bloomberg News survey.

Banking Profits

The banking industry is profiting from a rebound in stock markets in the past year. Europe's Dow Jones Stoxx 50 index, which reached a 16-month high on Jan. 22, has gained almost 12 percent in the past six months.

ABN Amro Holding NV, the largest Dutch bank by assets, will probably report a 9 percent increase in fourth-quarter profit today, according to the median forecast of 10 analysts. Deutsche Bank AG and BNP Paribas SA, the largest banks in Germany and France, may also say that profit was boosted by a rebound in demand for investment banking, Bloomberg News surveys showed.

An increase in corporate spending on telecommunications and software has increased sales at companies including Wanadoo SA, Europe's second-largest Internet service provider. Ixos Software AG, a German business software maker, said yesterday profit rose in its fiscal second quarter as demand within Europe increased.

In the U.S., a similar measure of the services industry probably rose to 60 from 58.6, according to the median forecast of 53 economists in a Bloomberg News survey. The Institute for Supply Management releases the report at 4 p.m. Frankfurt time.

Euro Effect

The expansion in Europe's service industries, which are less reliant on demand from abroad than factories, has so far outpaced growth in manufacturing, the NTC surveys show. The services index reached 57.5 in November, the highest in since October 2000, before slipping to 56.6 in December.

The 16 percent increase in the euro's value against the dollar in the past year, reducing revenue generated by European companies including software maker SAP AG in the U.S., may prompt exporters to lower costs in coming months.

There is also scant evidence of a recovery in consumer spending in the 12 euro-region economies, raising doubts as to whether the expansion in services can be sustained, economists said. Retail sales in Germany plunged 2.3 percent in December and Italian consumer confidence dropped to a 10-year low in January, government reports showed last week.

The expansion in the services industry ``doesn't quite tie in with the weakness of domestic demand,'' said Ken Wattret, an economist at BNP Paribas in London. ``I am not convinced that it is a broadly-based recovery yet.''

Cheaper Vacations

Some service companies are profiting from the euro's gains, which is lowering the cost of imported materials such as oil. KLM, Europe's fourth-largest airline, said last month the euro helped it post a profit in its fiscal third quarter. European travelers are able to travel more cheaply to the U.S. or dollar- linked destinations because of the euro's increase.

``We are all looking at the pressure'' the euro's appreciation ``creates for exporters and underestimating the price advantages on the import side,'' European Central Bank council member Klaus Liebscher said in an interview last week. ``No one talks about the consumer flying to the Caribbean -- he or she has certain advantages.''

The spread of bird flu and the threat of terrorist attacks may revive concern over travel. Four people have died in Thailand and nine have died in Vietnam from an outbreak of bird flu in Asia. British Airways Plc and Air France SA, Europe's two biggest airlines, canceled nine flights to the U.S. on the weekend following U.S. warnings of possible attacks by the terrorist group al-Qaeda.

Inflation Report

ECB policy makers have indicated they have no plans to change borrowing costs as the euro's appreciation helps keep inflation in check. The Frankfurt-based central bank will leave its main lending rate at 2 percent when they meet on Thursday, said all 39 economists in a Bloomberg News survey.

The inflation rate in the dozen nations sharing the euro probably stayed at 2 percent in January, in line with the central bank's limit, according to the median of 29 estimates in a Bloomberg News survey. Eurostat, the EU's statistics office releases its preliminary estimate of the inflation rate at noon.

With the economic recovery on track and inflation under control, investors expect no change in borrowing costs at least through the second quarter, interest rate futures trading shows. The yield on the three-month contract for June settlement was 2.12 percent late Tuesday in Frankfurt, compared with a money market rate of 2.09 percent. The September contract yielded 2.27 percent.

To contact the reporter on this story: Christian Baumgaertel in Frankfurt at cbaumgaertel@bloomberg.net.

Last Updated: February 4, 2004 02:19 EST