By Jonathan Cable
LONDON, March 24 (Reuters) - Key gauges of services and manufacturing activity suggested the economic contraction gripping the euro zone eased a little in March, against expectations, but firms continued to slash jobs and prices.
Markit said on Tuesday its Flash Eurozone Purchasing Managers Index for the dominant service sector rose to 40.1 in March, still well below the 50 mark where growth begins but ahead of February's 39.2 and considerably above expectations for 39.0.
"The key factor driving this is the perception that things cannot get much worse; confidence is gradually being restored and that is most evident in the service sector," said Chris Williamson at data compiler Markit.
Service sector firms, ranging from banks to restaurants, were a little less pessimistic about the outlook with an index measuring expectations for business in 12 months' time jumping to 47.5 from February's 46.1.
Factories in the euro zone also saw a slowing in the rate of decline with the flash Manufacturing PMI rising to 34.0, compared with 33.5 in February and above the 33.4 expected by economists.
The fall in new manufacturing orders was also a little less steep, with that index rising to 30.7 from 28.2 in February, while the stocks of finished goods index slumped to a record low, suggesting firms were managing to shift old stock.
Even so, companies battling against sinking demand and banks' reluctance to lend have been forced to slash jobs to cut costs and stay afloat.
The Composite employment index, which measures employment broadly in the euro area, dropped to 40.3, a record low for the 10-year-old index, from 40.8 in February.
"There are companies reducing hours and cutting shifts and alongside this the worrying factor is that the rate of decline is still gathering pace," Williamson said.
TROUBLED TIMES
However, the upturn in both sectors took the combined Composite index to 37.6, from February's 36.2 and above the 36.0 predicted, and Williamson said global efforts to combat recession by boosting government spending and cutting borrowing costs should help eventually.
"Given the stimulus measures and the global co-ordination, there is a strong case that global demand will see some recovery as we go through the year. It will probably be a long, slow process though," he said.
The European Central Bank has been forced to hack away at interest rates as it battles to breathe life into an economy that Reuters polls predict will contract 2.6 percent this year and it is widely expected to cut again later this week.
The euro zone economy shrank 1.5 percent in the last three months of 2008 and Williamson said it was on course to fare as badly or possibly worse in the current quarter.
Expectations for another rate cut will be reinforced by data showing input price pressures across the bloc fell to record lows and companies passed on their savings to customers, slashing their prices at a record pace.
Earlier data showed the pace of manufacturing and service sector decline eased a touch in Germany, the 16-nation bloc's largest economy, and in France too the downward pressure eased on both sectors.
(Editing by Ruth Pitchford)