Europe News

Euro zone business activity hits 2.5-year high

Business activity in the euro zone expanded at its fastest pace since June 2011 in January, driven by the region's burgeoning manufacturing sector.

Markit's composite purchasing manager's index (PMI) for the 18-nation currency zone rose to 52.9 in January, up from 52.1 in December. It was, however, lower than the flash estimate of 53.2 (a reading over 50 marks expansion).

The production line at the Jaguar Land Rover factory in Solihull, England
Oli Scarff | Getty Images

Separate data, also published Wednesday, revealed that December was a tough month for the retail sector. Sales fell by 1 percent in the month compared to December 2012 - significantly lower than the 1.5 percent rise expected by economists.

(Read more: Deflation fears: Will the ECB pull the trigger again?)

With regards to the PMIs, January marked the seventh consecutive month of growth in the euro zone economy.

The uptick was driven by the manufacturing industry, where accelerating new orders and export business pushed the rate of expansion close to a three-year high.The recovery in the services sector, however, was more subdued in January, with activity rising to 51.6 from 51.0 in December.

Chris Williamson, Markit's chief economist, said the reading signals a "very encouraging start" to 2014.

"The upturn is also feeding through to the labor market: employment has stabilized over the past two months, bringing an end to the continual culling of staffing levels seen since the start of 2012," he said in a release.

(Read more: UK construction at 6-1/2 year high in January)

"Hopefully we will now soon see companies start to generate new jobs in significant enough numbers to bring down the region's unemployment rate in coming months, which will perhaps represent the true start of the economic recovery for many people."

Europe is 'out of the woods': Pro
Europe is 'out of the woods': Pro

The euro zone's unemployment rate remained stuck at 12 percent for December, although the number of jobless people in the region fell by 129,000 - the largest monthly fall since the start of the financial crisis.

Breaking the PMI data down to a country level, Ireland, Germany and Spain were among those that reported strengthening economies, with Germany's output growth coming in at 55.5 - a 31-month high - and Spain's rising to a 78-month high of 54.8.

(Read more: Deflation fears back: Euro zone inflation falls again)

France, however, continued to lag behind its European counterparts. Its composite PMI came in a 48.9 in January following contractions in both the manufacturing and services sectors, although this was a 3-month high for the country.

Howard Archer, chief European economist at IHS Global Insight, said the data was "modestly supportive" of growth hopes for the region, with most euro zone countries seeing improved performances.

"Particularly welcome news saw Spanish services expansion pick up to a 78-month high which boosts hopes that the economy can establish sustainable recovery over the coming months," he said.

"French services activity contracted for a third month running in January, albeit at a reduced rate... This does little to dilute reinforces concern over the underlying state of the French economy."

By CNBC's Katrina Bishop. Follow her on Twitter @KatrinaBishop and Google