By Jonathan Cable
LONDON (Reuters) -Euro zone business activity showed surprising strength in August despite firms raising prices, a survey showed, potentially weakening expectations for two more rate cuts from the European Central Bank this year.
However there were signs the upswing may be temporary, with readings flattered by a sharp rise in French services activity due to the Olympic Games.
German business activity contracted for a second consecutive month and by more than expected.
"The rise in the flash PMIs for August is not as good as it looks as it was largely due to a boost from the Paris Olympics and the survey still points to GDP growth slowing in Q3," said Franziska Palmas at Capital Economics.
"With price pressures still rising, the ECB will remain cautious."
HCOB's preliminary composite Purchasing Managers' Index, compiled by S&P Global, bounced to 51.2 this month from July's 50.2, moving away from the 50 mark separating growth from contraction.
That confounded expectations in a Reuters poll for a dip to 50.1 and beat even the most optimistic prediction for 50.8.
The rebound in activity came even as firms in the 20-country currency union raised prices at a faster pace. The composite output prices index climbed to 52.9 from 52.1.
An unexpected rise in July euro zone inflation, a resilient labour market and steady economic activity could make ECB policymakers hesitant to ease policy much further.
Having reduced the deposit rate in June, policymakers paused in July although a Reuters poll published last week suggested there would be two additional cuts this year.
The PMI for Germany suggested Europe's largest economy - which contracted by 0.1% in the second quarter - fared no better going into the second half of the year.
In France overall growth received support from a pick-up in business due to the Olympics as a sharp upswing in the country's services sector offset ongoing weakness in manufacturing.
In Britain, outside the European Union, business activity accelerated and cost pressures eased to their weakest in over three years, signalling steady growth momentum going into the second half of 2024.
GOLD FOR SERVICES
A PMI covering the euro zone services industry soared to 53.3 this month from 51.9, beating a poll prediction for no change.
While some of that activity was driven by services firms reducing backlogs of work, overall demand improved. The new business index rose to a three-month high of 51.3 from 50.8.
The manufacturing PMI dipped to an eight-month low of 45.6 from July's 45.8. Still, an index measuring output nudged up to 45.7 from 45.6.
"Another strong month for services helped to outweigh a softening manufacturing sector again," said Matthew Landon at J.P. Morgan Private Bank.
"The 'Olympics effect' makes it harder to unpack the underlying strength of the economy, but the totality of data seems broadly consistent with solid but slowing growth for the region."
Optimism among factory managers waned again and they reduced headcount at the fasted rate since November. The manufacturing employment index fell to 46.6 from 47.0.