Euro Zone, UK Services PMI Better than Expected

Business activity in the euro zone had its biggest one-month rise since December 2001, while activity in Britain's service sector shrank at its slowest pace since last August, suggesting the worst part of the recession if over.

A key index of services business activity staged its biggest one-month rise since December 2001 and firms were even more optimistic about the future, suggesting the worst phase of a severe recession has probably passed.

Markit unexpectedly revised up its services business activity index to 43.8 compared with a flash reading of 43.1, indicating the slowest pace of contraction in six months for a sector covering everything from financial services to airlines.

The figure was well above the 40.9 in March, but still below the 50 mark that divides growth and contraction.

The rate of contraction slowed in all four of the biggest euro zone countries and to the slowest in nearly a year for Spain.

The survey of 2,000 companies also revealed businesses as a whole had their brightest outlook since June, before the latest leg of the financial crisis set in, catapulting the world economy into its worst recession since World War Two.

Analysts were convinced that the figures suggested the worst had passed but they were not universally optimistic that better times were straight ahead, still calling for another 25 basis point European Central Bank interest rate cut on Thursday.

"We're off the lows but still shrinking, albeit at a slower pace in Q2 versus Q1," noted Kenneth Broux, economist at Lloyds TSB Corporate Markets. "The glass is half empty, not half full."

The figures came before news that the comparable UK survey pointed to the slowest pace of contraction in eight months and a similar bounce in business expectations.

Financial markets shrugged off the euro zone figures.

Slower Rate of Contraction

The euro zone composite PMI, which includes manufacturing figures released on Monday which also were revised higher, rose to 41.1, also its highest since October, from 38.3 in March.

That pointed to a milder rate of economic contraction than the expected 1.9 percent rate expected in the latest Reuters poll for the first three months of the year.

The economy contracted by 1.6 percent in the final months of 2008.

The upwardly-revised 54.4 reading for services business expectations from 48.6 the prior month was the biggest one-month rise in this index since January 2002.

That is likely to further encourage optimists who expect the economy to grow again later this year — although the index registered 58.7 in April 2008 and completely missed the worst recession in generations unfolding in months afterward.

Business expectations were the rosiest in 15 months for Spain, and the brightest in 10 months for both Germany and France. They hit an eight-month high in Italy.

Even the index measuring incoming new services business rose more than a full point compared with the flash estimate.

That suggested that the pace of decline had narrowed in most euro zone countries, even though orders deteriorated even more sharply in Germany.

The figures came a day after the comparable survey of U.S. service sector activity jumped more than expected to 43.7 in April from 40.8, triggering more optimism that the world's largest economy will grow again later this year.

The report indicated, however, that official unemployment, already at 8.9 percent for the euro area as a whole and a staggering 17.4 in Spain, is set to rise even further, with record rates of job cutting in the euro area service sector.

Air France-KLM announced in mid-April that it would cut between 2,500-3,000 jobs in the next two financial years after cutting 2,400 in the fiscal year ended in March.

German airline Lufthansa said last week it could cut capacity on long-haul flights by up to 8 percent if demand deteriorated further.

"The key message is that it provides hope that the economy will contract less in Q2 than in Q1," said Ben May, economist at consultancy Capital Economics. "But we are pretty gloomy about the outlook for Q1 — we could see falls of around 2.5 percent. And that said, you may well still see sharp falls in output in Q2."

UK Services PMI at 8-Month High in April

Activity in Britain's service sector shrank at its slowest pace since last August, helped by a marked improvement in new business and confidence in the outlook, a survey showed on Wednesday.

The CIPS/Markit services PMI activity index rose to 48.7 in April from 45.5 in March, the highest reading since August 2008 and the biggest one-month rise in the index since April 1999.

That still left it below the 50-mark that separates expansion from contraction, but was well above analysts' forecasts for a more modest improvement to 46.0.

All the sub-indexes rose last month, with new business jumping 4.1 points to 48.2, the biggest rise since March 1999 and the highest reading since April 2008, when it was last above 50.

The pound hit a session high against the dollar and euro and gilt futures fell as investors speculated the economic downturn may be starting to bottom out, especially after an equivalent survey on the manufacturing sector was also stronger than expected.

"While a number of historical statistics are still showing a severe contraction, more forward-looking indicators are beginning to post a marked improvement," said Philip Shaw, economist at Investec. "This is consistent with some sort of recovery in the economy in the second half of this year."

The service sector accounts for around three-quarters of Britain's economic output and Wednesday's survey adds to evidence that suggests the economic downturn may be starting to level off after shrinking by 1.9 percent in early 2009.

The survey is also likely to dampen expectations that the Bank of England will extend its 75 billion pound ($113 billion) scheme to kick-start growth by purchasing assets such as gilts and corporate bonds.

BoE policymakers are widely expected to keep interest rates on hold at a record low of 0.5 percent when their monthly meeting ends at 12 pm London time on Thursday.

Positive Outlook

Nearly half of companies polled said they expected activity to increase in a year's time, taking the business expectations index to its highest since last May.

"Given the considerable downside surprise of GDP in Q1 and the recent upward trajectories of the survey data, it seems fair to assume that a much slower rate of contraction will be observed in Q2," said Paul Smith, economist at survey compilers Markit Economics.

However he warned that rising unemployment and the weak housing market would continue to hurt companies providing services to consumers, and that the sector was unlikely to see a return to growth anytime soon.

Indeed, almost a fifth of services firms cut jobs in April, although the index rebounded from a survey low in March to its highest since last November.

And the weak pound continued to drive up input costs, although weak demand and strong competition meant companies remained under pressure to cut their prices.

Detailed PMI data are only available under licence from Markit and customers need to apply to Markit for a license.

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