LONDON—Early data for April show the euro-zone economy is expanding more strongly than many expected and inflation pressures are continuing to build, the latest sign that the European Central Bank may raise interest rates again soon.
However, consumer confidence in the 17 countries that share the euro fell to its lowest level for eight months in April, an indication that although sectors that are geared towards exports may be doing well, high oil prices and inflation may be weighing on domestic demand.
The preliminary results of a monthly survey by financial information firm Markit Tuesday showed euro-zone growth picked up unexpectedly to the second-fastest rate since mid-2007 in April, and prices charged by companies rose at a near-record rate.
"The April survey is consistent with GDP [gross domestic product] rising at a quarterly rate of 0.8% [in the second quarter], the same buoyant pace as signaled for the first quarter," said Chris Williamson, chief economist at Markit. "Less welcome was the news on inflation, with prices charged for goods and services showing the largest monthly jump since the all-time high seen during the oil-price peak of 2008."
The flash reading of the euro zone's Composite Output Index, a gauge of activity based on partial results of a survey of manufacturing and services firms, rose to 57.8 in April from 57.6 in March, the second-highest reading since June 2007. A reading above the neutral 50 level indicates an expansion in activity.
The survey showed activity in the service sector eased but still grew at the second-strongest rate since August 2007, while the manufacturing sector expanded at the second-fastest pace since mid-2006. Euro-zone private sector employment also rose at the fastest rate since November 2007.
"Today's better-than-expected PMI data suggests that the economic recovery in the euro zone as a whole remains little affected so far by the combination of fiscal tightening, high oil prices, a strong euro, and a lingering debt crisis," said Martin van Vliet, an economist at ING.
Other data from the European Union's Eurostat agency released Tuesday showed euro-zone construction output fell 0.7% in February after surging 3.6% in January due to disruption from severe winter weather at the end of 2010. Taken together, that suggests the building sector could provide a boost to economic growth in the first quarter.
However, the Markit survey showed inflation risks remain. Average prices charged rose for a ninth month running, with inflation accelerating to just below the all-time high seen in July 2008.
That strengthened expectations the ECB will tighten monetary policy further. The euro zone's central bank raised interest rates by a quarter of a percentage point to 1.25% on April 7, the first increase since mid-2008. The bank cited a need to prevent rising consumer prices from leading to broad-based inflation.
James Nixon, an economist at Société Générale, said the signs that growth is continuing into April, combined with the surprisingly strong 2.7% inflation rate in March, make it a virtual certainty that the ECB will deliver its next rate increase in June.
"I think the most sensible benchmark is [0.25 percentage point] per quarter," he said. "What we're hearing from the ECB is they have had enough of maintaining negative real interest rates."
In an interview with a Portuguese newspaper published Tuesday, ECB Executive Board member Jürgen Stark said the central bank's main interest rate is still very low and accommodative. He was quoted as saying the ECB doesn't have a predetermined path for interest rates, but normalization means a gradual rise.
But the Markit survey also showed the euro zone's economic recovery remains very uneven. France's private sector expanded at the fastest rate since September 2000, fueled by a surge in services, and German growth slowed but remained robust. However, growth outside those two countries remained very modest, weakening to a three-month low as a near-stagnation in services offset robust manufacturing growth.
That suggests the countries at the heart of the euro zone's debt crisis—Greece, Ireland, Portugal and Spain—continue to lag behind the euro zone's two biggest economies.
Also weighing on the region's growth prospects is the poor state of consumer confidence, dented by a range of factors. Inflation is accelerating, oil prices are elevated, the debt crisis has flared up again, and Japan is still tackling its worst-ever nuclear crisis.
The European Commission said its preliminary consumer confidence indicator dropped to minus 11.4 from minus 10.6 in March, the weakest reading since last August.
—Alex Brittain contributed to this article.
Write to Nicholas Winning at nick.winning@dowjones.com
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