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Euro zone business activity nears 3-year peak

A nascent recovery in euro zone business activity continued on Wednesday with data managing to beat analysts' expectations, despite slower growth in France and fears of falling prices weighing on sentiment.

Markit's flash purchasing managers' index (PMI) for April revealed that the euro zone's composite index rose to 54.0, up from 53.1 in March. A reading above 50 marks an expansion in the private sector.

The data was driven by strong growth in Germany, with the composite number rising to 56.3 in April, from 54.3 in March. France saw slower growth in its private sector, but output rose for a second month with a figure of 50.5, down from March's 51.8 reading. Output in the euro zone's second-largest economy was hit by new orders in manufacturing, which stagnated after rising in March. This caused French firms to once again cut back on their staffing levels, according to Markit, the London-based research company that collates the data.

The data provided proof that French growth was still "fragile", according to Howard Archer, an economist at IHS Global Insight. This was in marked contrast to the "robust" expansion he suggested the German numbers indicated.

The single currency rose to a session high of $1.3843 shortly after the data release. The euro had started the session at $1.3806. European stock markets showed little change with earnings release in the tech sector continuing to weigh on investor sentiment.

Despite the softer data from France, the private sector in the euro area grew at its fastest in just under three years in April, with the bloc as a whole showing signs of a return to job creation.

"With backlogs of work rising, albeit only modestly, firms took on more staff in order to expand capacity. The increase in employment was the largest since September 2011, and only the second since 2011. Rates of job creation in both the manufacturing and service sectors were nevertheless only modest as many firms continued to focus on keeping costs low to boost competitiveness," the company said in Wednesday's release.

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Chris Williamson, Markit's chief economist added that these PMIs mean that GDP (gross domestic product) for the euro zone is on course to rise by 0.5 percent in the second quarter, building on a 0.4 percent rise in the first quarter.

"Perhaps the best news came from the rest of the region, where the fastest rate of growth seen since early-2011 suggests that the recovery in the 'periphery' is gaining traction," he said.

As well as the worse-than-expected French data, Williamson said the outlook for prices is a concern. The euro bloc has recently posted some weak growth in consumer prices and market watchers have warned against the threat of dwindling inflation and the possibility of deflation - where consumer prices start to fall.

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The European Central Bank (ECB) has said that it is monitoring the situation and has hinted that it would be ready to act if this weakness continued. Williamson said that Markit's data showed prices falling at their fastest pace since last August despite the upturn in activity.

"There will be growing fears that deflationary pressures are intensifying and that the ECB needs to respond with more than just words to the recent appreciation of the exchange rate," he said.

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