By Nigel Davies
LONDON, Jan 23 (Reuters) - Euro zone services and manufacturing activity declined at a slightly slower pace in January, a touch better than forecasts, but remained deep in recessionary territory, key business surveys showed on Friday.
The weak data is likely to bolster expectations that the European Central Bank will cut interest rates again in March. The ECB's cause will be aided by more signs of sharp falls in inflationary pressures.
The Markit Eurozone Purchasing Managers Index for services companies ranging from banks to bars edged up to 42.5 in January from a low for the 10-year-old survey of 42.1 in December.
That was above the 41.5 consensus forecast from economists, but was still well below the 50.0 line that divides growth from contraction for the eighth month running.
Companies in the 16-nation bloc have faced a torrid start to the year as credit conditions remain tight in the face of a severe global recession, forcing many to cut jobs in order to remain afloat and to offer heavily discounted products as demand falls.
Euro zone factories also saw a modest deceleration in the steep rate of decline set in the prior month, but still showed significant contraction.
The flash manufacturing PMI rose to 34.5 from a record survey low the previous month of 33.9, coming in above analysts' expectations for another fall to 33.2.
"There is some hope here that the worst is over, but we don't expect any sharp upturns soon," said Chris Williamson, chief economist at Markit, the data provider.
"The environment as we move into 2009 is extremely adverse for manufacturing and service sector companies. Manufacturers are clearly bearing the brunt of the global downturn," he added.
Earlier data showed that conditions in Germany, the euro zone's largest economy, deteriorated even faster across both its services and manufacturing sectors. France saw a moderation in the pace of decline.
BUSINESS EXPECTATIONS
A mild tick up in the euro zone services PMI came as the index measuring business expectations in the year ahead bounced, still showing overall pessimism but a tentative sign that companies think business may not get much worse. That index rose for a second straight month to 47.5, some way up on the 42.3 level hit in December.
The move up in both services and manufacturing took the Composite index combining the two up to 38.5 from a survey low of 38.2 the previous month.
The services data also showed a marginal increase in companies' costs, while the prices they charged fell in a further sign of weak consumer demand. The composite index showed output prices across manufacturing and services fell to 43.7 from 45.3, a survey low.
Weak data, coupled with easing inflationary pressures will make the ECB's job easier as markets and economists continue to expect it to cut rates. The ECB has cut rates by 225 basis points already since October to reach 2.0 percent. Most economists predict it to cut to new lows at its March meeting to 1.5 percent. [ECILT/EU]
MANUFACTURERS CHOP JOBS
Factories are facing an even tougher time than the euro zone's services-led economy.
A tiny up-tick in the manufacturing PMI did not disguise the fact that sub-indices remained close to record lows.
However, new orders taken by companies faced a better month than a dire December as this sub-index rose to 28.9 from 26.4. Export orders also picked up on the month.
But that did not stop manufacturers from cutting jobs. The employment index fell to its lowest on record, while service sector employment continued to shrink.
The data conform with a dreadful outlook for economic growth this year. The European Commission forecast contraction of 1.9 percent in the euro zone this year, a little more than the 1.6 percent that economists predicted in a Reuters poll this week.
(Editing by Ruth Pitchford)