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Euro zone business slump eases but second quarter contraction likely: PMI

People wait to enter a government job centre in Madrid August 2, 2010. REUTERS/Susana Vera
People wait to enter a government job centre in Madrid August 2, 2010. REUTERS/Susana Vera

By Jonathan Cable

LONDON (Reuters) - The euro zone's private sector slump has eased more than expected this month, business surveys showed on Thursday, but a continued slide in new orders suggested a full recovery is still some way off.

The data will come as good news for the European Central Bank as the decline eased across the 17-nation bloc.

Markit's Flash Eurozone Composite Purchasing Managers' Index, which makes up around 85 percent of the final reading and is seen as a reliable economic growth indicator for the bloc, rose to 48.9 in June from May's 47.7.

That was its highest since March 2012, and beat forecasts in a Reuters poll of 23 economists for a more modest upturn to 48.1, but the index has been below the 50 mark that separates growth from contraction for all apart from one of the last 22 months.

"The most encouraging picture is outside of France and Germany where the rest of the region is seeing the weakest rate of decline for two years - and it is only a modest decline," said Chris Williamson, chief economist at Markit.

"At this rate we should see stabilization in the third quarter and growth appearing in the fourth. It's corresponding with the view of policymakers of the second half of the year looking much better," Williamson said.

The euro zone has been in recession for a year and a half and Markit said the latest PMI data suggested the economy would contract 0.2 percent in the current quarter.

That compares to a flat outlook in a Reuters poll published last week.

In a sign that there would be a wait before any recovery took hold, new orders fell for the 23rd month, although the subindex rose to 47.4 from 46.8.

"It's suggesting that things are moving in the right direction but it's not going to happen fast. It's still a weak picture," Williamson said.

The ECB has come under growing pressure to take more action to help bring a quicker end to the bloc's longest recession, but economists polled by Reuters last month did not predict any easing of policy in coming months.

"Euro area policymakers will no doubt be encouraged by these improving indicators, suggesting the ECB will see no need for any further action in the near term," Williamson said.

A PMI covering services firms, which make up the bulk of the bloc's economy, jumped to 48.6 last month from 47.2, its highest reading since January but its 17th straight month below 50.

Still, that was above even the most optimistic of forecasts in a Reuters poll and smashed the median expectation for a rise to 47.5. The survey also showed firms were increasingly optimistic about the year ahead.

The flash manufacturing PMI nudged up to 48.7 from 48.3, just pipping forecasts for a reading of 48.6. However, as in every month for the last two years, some of that activity was generated by running down backlogs of work.

An earlier flash composite PMI from Germany rose to a four-month high of 50.9 but in France, the index held stubbornly below the 50 mark for the 16th month at 46.8, albeit a solid improvement on May's 44.6.

(Editing by Hugh Lawson)

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