Euro Zone May Yet Escape Recession as Services Jump

The euro zone may yet escape recession thanks to a surprise upturn in the service sector that outweighed the ongoing contraction in manufacturing this month, surveys showed on Tuesday.

Markit's Flash Eurozone Purchasing Managers' Composite Index (PMI), often seen as a growth indicator, jumped to 50.4 from December's 48.3, its highest reading in four months.

That easily beat the highest forecast of 49.5 in a Reuters poll, which gave a median prediction of 48.5.

"The index seems to have bottomed out in October and we've had three months of improvement. Three months we see as a turning point signal, and we are beginning to get a bit more confident," said Chris Williamson, chief economist at data provider Markit.

"So it may not be a recession in the euro zone but a very brief period of decline."

A Reuters poll last week predicted the euro zone would wallow in a mild recession until the second half of this year and shrink in 2012 by around 0.3 percent.

But some of the recent growth was spurred by reducing backlogs of work, with the composite sub-index remaining below 50 at 47.2, albeit up slightly from December's 46.4.

Firms were also forced to cut prices for the second month to drum up business, despite input costs rising.

In a worrying sign for policymakers, the big two economies of Germany and France supported growth in the bloc, the rest of which remained firmly in contraction territory, Markit said.

Earlier data from Germany, the backbone of the bloc, showed its service sector expanded at its fastest pace in seven months—far quicker than expected—while manufacturing activity increased for the first time in four months.

France's service sector grew at its fastest pace since August, but factory sector activity declined for the sixth straight month.

Services Boost

The service sector PMI rose to 50.5 this month from 48.8 in December, the first time it has been above the 50 mark that divides growth from contraction since last August.

That beat both the median prediction of 49.0 and the highest forecast of 50.0 in a Reuters poll.

The manufacturing PMI came in at 48.7, above December's 46.9 and also beating both the top-end forecast and a median prediction for 47.3 in a Reuters poll.

Factory output held steady this month, with the index at 50.0, considerably higher than December's 47.1.

Despite the continued contraction, factories took on extra workers this month. The jobs sub-index rose to 50.5 from 49.9, but service sector firms reduced their workforce as they battled to rein in costs.

Official data showed the unemployment rate held steady at 10.3 percent in November but a Reuters poll predicts it will rise this year.

Optimistic

Services firms, ranging from banks to hotels, grew more optimistic about the future with the business expectations index jumping to 56.0 this month from December's 53.6, the highest reading since August.

"We saw companies more confident in the outlook that they think the euro zone's crisis may be coming to some sort of conclusion with some deal-making on Greek bonds in particular," Williamson said.

The bloc has struggled as the debt crisis that began in Greece over two years ago has raged on, threatening to rip the currency union apart, while it has also been hurt by a global economic slowdown.

But France and Germany said on Monday that a deal with private sector investors to reduce Greece's debt burden was "taking shape" although Athens needed to stick to its reform promises to secure a new EU/IMF program it needs to avoid default by March.