By Jonathan Cable
LONDON (Reuters) - Euro zone business growth slowed sharply this month as demand fell for the first time since February, a survey found, with the bloc's services industry showing some signs of weakening while the downturn in manufacturing took a turn for the worse.
That was despite the European Central Bank delivering a widely telegraphed cut to interest rates earlier this month and expectations in a Reuters poll for two more reductions this year.
HCOB's preliminary composite Purchasing Managers' Index, compiled by S&P Global, sank to 50.8 this month from May's 52.2. The drop confounded expectations in a Reuters poll for a rise to 52.5 and took it close to the 50 level that separates growth from contraction.
"The sharp drop in the euro zone composite PMI in June suggests a solid recovery in the euro zone economy is not a done deal," said Franziska Palmas at Capital Economics.
An overall new business index dropped to a four-month low of 49.2 from 51.6.
The upturn in business activity in Germany, Europe's largest economy, over the past two months slowed in June as manufacturing weakness dragged on a buoyant services sector, its PMI showed.
ELECTION NERVES
France's services industry contracted more than expected this month, dragged down by weak demand and financial market jitters as the euro zone's second-biggest economy heads into snap parliamentary elections.
Marine Le Pen's far-right National Rally is seen leading the race, three polls showed on Thursday, ahead of the leftwing Popular Front and President Emmanuel Macron's centrists.
As the far right and leftist parties gain momentum investors are starting to contemplate the risk of a budget crisis at the heart of the euro zone.
In Britain, outside the European Union and heading to the voting booths next month, businesses expanded at the slowest pace since the economy was in recession last year, as some companies put big decisions on hold until after July 4's election.
Opinion polls show Keir Starmer's Labour Party is set to return to power for the first time since 2010 as Prime Minister Rishi Sunak's Conservatives head for an historic defeat after he unexpectedly called an early election last month.
Three polls on this week predicted a record defeat for Sunak's Conservatives and forecast Labour would comfortably win a large majority.
Separate data on Friday showed British retail sales rebounded last month after heavy rain kept shoppers away in April.
ECB ACTION
A PMI for the currency union's dominant services industry fell to 52.6 from 53.2. The Reuters poll predicted an uptick to 53.5.
But inflationary pressures eased, strengthening the case for further ECB interest rate cuts this year. The services output prices index declined to 53.7 from 54.2, its lowest reading in just over three years.
"With price pressures easing according to the survey, this confirms the view of a moderate economic environment in line with expectations of very cautious easing from the ECB," said Bert Colijn at ING.
Manufacturing activity, in decline for almost two years, reversed recent signs of heading for a recovery. The factory PMI dropped to a six-month low of 45.6 from 47.3. Expectations in the Reuters poll were for a lift to 47.9.
An index measuring output plummeted to 46.0 from 49.3.
That downturn pushed factories to reduce headcount for a thirteenth month.