Europe's Economic Woes Ease Slightly in May, Prospects Mixed

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Europe's economic woes eased slightly last month, helped by a surge in British services business and signs the downturn in the euro zone is starting to ease, surveys showed on Wednesday.

Still subdued euro zone Markit purchasing managers indexes (PMIs) kept pressure on the European Central Bank to do more to stimulate growth, but did not change the view the bank will leave monetary policy unchanged after its meeting on Thursday.

The Bank of England is expected to do likewise, though the stronger PMI showing in Britain tempered expectations its new governor Mark Carney, who takes over in July, will turn to aggressive monetary easing in the near term.

Although slightly more upbeat in tone than in April, the May PMIs suggested the euro zone's recession will continue through the current quarter after Eurostat confirmed the economy shrank 0.2 percent between January and March.

By contrast, Britain's services sector grew much faster than expected as order books filled at the fastest rate in more than three years.

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That bodes well, but to a large extent the prospects for a strong British recovery still hinge on a return to growth in the euro zone, its biggest trading partner, which still looks a way off.

"For the euro zone itself, the best you can say is the pace of the domestic contraction is easing," said Janet Henry, chief European economist at HSBC.

Euro zone retail sales slumped 0.5 percent in April, much worse than the 0.1 percent decline expected by economists, and further underlining that the region will struggle to escape its longest-ever recession this quarter.

"The only way we're going to get positive growth in the euro zone is by seeing exports expanding. We still need the U.S. recovery to hold up and some improvement to come through from the emerging world," Henry added.

That looks by no means certain, following a fairly dour Chinese services PMI earlier on Wednesday.

However, Henry said the Spanish PMI, which showed its services sector shrank at the slowest rate since mid-2011 last month, represented some cause for optimism.

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Two-Speed Europe

Markit's Eurozone Composite PMI, which gauges how thousands of businesses across the region fare each month, rose in May to 47.7 from 46.9, unchanged from a preliminary reading.

Although the index improved for the second month in a row, it has been rooted below the 50 threshold that separates growth from contraction for all but one month since September 2011.

A dearth of new orders in the services sector, which accounts for the bulk of the private economy, means it is by no means certain the surveys will improve again next month.

Survey compiler Markit said the data was consistent with the euro zone economy again shrinking by 0.2 percent this quarter.

The ECB is seeking ways to support growth, although economists do not expect it will cut either its main refinancing rate or deposit rate on Thursday to new record lows.

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"We expect the ECB to eventually take interest rates down from 0.50 percent to 0.25 percent," Howard Archer, chief UK and European economist at IHS Global Insight, said.

"However, this seems unlikely to happen as soon as its June meeting on Thursday given the modestly improved overall (PMI) surveys for May."

In the UK, there were far clearer signs the economy is regaining a firmer footing.

The UK services PMI rose to 54.9 in May from 52.9 in April - the strongest reading since March 2012 and easily beat the top forecast of 53.6 in a Reuters poll of 30 economists.

"It's a very decent result. It's encouraging that all three PMI surveys have been positive this week," said Philip Shaw, chief economist at Investec, referring to the PMIs for manufacturing and construction as well.

"It follows a run of generally better-than-expected data and suggests the economy is on a firmer footing. The sharp rise in the new business index is particularly encouraging."

Globally, the outlook still looks mixed.

China's economy, the world's second biggest, is struggling to maintain momentum, according to PMIs earlier on Wednesday. However, the ISM services index for the United States, due at 1400 GMT, is expected to show a slight increase in activity.