LONDON, Feb 22 (Reuters) - The downturn in euro zone business activity eased in February, suggesting signs of recovery, as the dominant services sector broke a six-month streak of contraction and offset a deterioration in manufacturing, a survey showed on Thursday.
Last year, the bloc's economy stagnated, underperforming the rest of the world as former powerhouse Germany struggled with an industrial malaise that shows no sign of abating.
HCOB's preliminary composite PMI, compiled by S&P Global, rose to 48.9 this month from January's 47.9, ahead of expectations in a Reuters poll for 48.5 but marking its ninth month below the 50 level separating growth from contraction.
"Flash PMIs for February show that the euro zone may be on a slow path towards recovery. While encouraging, we still think the economy will struggle to gain traction this year," said Leo Barincou at Oxford Economics.
The economic downturn in Germany, Europe's largest economy, deepened this month as a slight improvement in services activity was unable to compensate for a surprisingly sharp deterioration in manufacturing.
However, the fall in French business activity eased considerably and business confidence strengthened to a seven-month high.
The European Union's economy is stronger as a result of the recovery fund, set up to drive post-pandemic growth, the European Commission said on Thursday.
In Britain, outside of the EU, the economy kept up its early 2024 momentum with strong growth for services firms, but inflation pressures are likely to keep the Bank of England wary about cutting borrowing costs.
SERVICES SURPRISE
Optimism improved across the currency union and firms increased headcount at the fastest pace since July in a sign they expect momentum to continue. The employment index climbed to 51.2 from 50.1.
The euro zone services PMI jumped to 50.0 from January's 48.4, far exceeding the poll expectation for 48.8.
But again, as in January, there were signs of inflationary pressures with both services input and output prices indexes rising. The output price index rose to a nine-month high of 56.9 from 56.3.
"This will support those on the ECB Governing Council who are arguing that it is too early to consider interest rate cuts," said Andrew Kenningham at Capital Economics.
European Central Bank policymakers held interest rates at a record-high of 4% last month and reaffirmed their commitment to fighting inflation even as investors bet on lower borrowing costs this year.
January inflation was 2.8%, official data confirmed on Thursday, considerably above the ECB's 2% target.
Still, expectations for an interest rate cut from the ECB next quarter have grown stronger in recent Reuters polls although on Thursday money markets scaled back their bets on the magnitude of cuts this year.
The downturn in the manufacturing industry deepened this month with its PMI dropping to 46.1 from 46.6, confounding expectations in a Reuters poll for a rise to 47.0. It has been sub-50 since July 2022.
Reporting by Jonathan Cable; editing by Christina Fincher
