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UPDATE 1-POLL-Euro zone PMI hits 2-yr high, pace slows

Published 11/23/2009, 05:09 AM
Updated 11/23/2009, 05:12 AM

(Adds graphics, market reaction, analyst comment)

* Euro zone services PMI hits two year-high

* Manufacturing activity edges higher in November

* Job losses still mounting

By Nigel Davies

LONDON, Nov 23 (Reuters) - The euro zone's dominant service sector grew at its fastest pace in two years in November suggesting an economic recovery will continue in the fourth quarter, albeit at a slower rate, a key survey showed on Monday.

The data indicate the euro zone economy made further recovery progress after emerging from its worst ever recession in the third quarter, although the rate of growth to come is likely to be weak.

Markit's Eurozone Flash Service Purchasing Managers Index composed of surveys of around 2,000 companies ranging from cafes to banks rose to 53.2 in November from 52.6 in October, its highest since November 2007.

That was the third month in a row the index was above the 50 mark separating growth from contraction, and beat economists' expectations for it to hit 52.8, but markets were little moved by the data.

"The numbers are still consistent with GDP continuing to expand ... but it was a very small improvement compared to what we are used to seeing," said Silvio Peruzzo at RBS

"The main take from today's data is that they suggest that the pace of improvement -- which was very sharp -- may be decelerating."

Euro zone gross domestic product grew by 0.4 percent in the third quarter, and a Reuters poll showed it growing by 0.3 percent in the fourth.

On Thursday the Organisation for Economic Co-operation and Development said the euro zone economy should grow by 0.9 percent in 2010 after a contraction of 4.0 percent this year.

Growth was forecast to remain sluggish throughout 2010, which may help the European Central Bank keep interest rates at record low levels for some time yet.

"There are warning signs within the surveys that the recovery may lack stamina and could well slow early in 2010," said Howard Archer at IHS Global Insight.

"Consequently, there is a compelling case for the ECB to only very gradually withdraw its emergency liquidity measures, and to keep interest rates down at 1.0 percent until deep into 2010."

The slowing was echoed by a fall in the PMI's new business index to 51.2 from 52.7 in October, indicating companies were still finding it tough to drum up demand.

Earlier data showed Germany's industrial and services economies picking up again, while France powered forward with its services PMI cruising to its highest level since October 2006.

Both countries made their way out of recession in the second quarter of the year, followed by Italy in the third, and leaving only Spain among the four largest economies still stuck in a heavy recession.

The euro zone manufacturing sector, which drove a large part of the return to growth in the third quarter, also performed well in November. The flash manufacturing index rose to 51.0 from 50.7 in October, its highest level since March 2008.

The index was pulled higher by moves higher in output, new orders and exports. Manufacturing performance came despite a strong euro, up around six percent against the dollar since the start of the year, which has bit into euro zone exporters.

The rise across the services and manufacturing sectors took the Composite index to 53.7 from 53.0 in October, just above economists' expectations.

OUTLOOK PROMISING, BUT JOB LOSSES WEIGH

The surveys also pointed to a much more robust looking industrial sector.

The manufacturing PMI's output index rose to 54.6 in November as factories upped the pace of production. That was its highest level since September 2007, and a huge 22 points higher than the level it was at this time last year.

Yet promising numbers contrasted with figures showing jobs were lost across both manufacturing and service companies. The composite PMI employment index touched 45.5 last month from 45.4 in October, the seventeenth month running of job losses.

The surveys also showed inflation pressures picked up in November, even if costs passed on to customers fell as demand remained weak.

(Editing by Victoria Main/Ruth Pitchford) ((nigel.davies@thomsonreuters.com; +44 20 7542 3345: Reuters messaging: rm://nigel.davies.reuters.com@reuters.net))

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