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August 22, 2009

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Euro zone crawls to growth

THE euro zone economy probably crawled back to growth this quarter after its worst recession on record as firms' outlook for the future brightened to the best in more than two years, key surveys showed yesterday.

Markit's Composite Purchasing Managers Index for the euro zone, which combines activity in both the dominant services and manufacturing sectors, leapt to the cusp of expansionary levels in August and the equivalent surveys for the currency bloc's two biggest economies both leapt into positive territory.

Economists cautioned that high and still rising unemployment could yet prove a stumbling block to a lasting recovery but said recession in the euro area was clearly fading fast.

"The further sharp rise in the euro zone composite PMI index suggests that underlying economic conditions continued to improve markedly in August," said Ben May at Capital Economics. "The upshot is that the worst of the downturn certainly now appears to be over and the economy might even be beginning to expand again."

The euro zone composite PMI jumped by 3 points to 50.0 in August, the precise point that divides contraction and growth, and came in far higher than most economists' forecasts.

Services activity in Germany expanded for the first time in 11 months while in France the manufacturing sector grew for the first time since May 2008, also beating consensus expectations.

"The surveys add to recent data suggesting that the recession is over and, indeed, the economy most likely grew in Q3," said Nick Kounis at Fortis.

Sharpest drop

The euro zone economy contracted 0.1 percent in the second quarter of this year, having shrunk by 2.5 percent in the first quarter -- the sharpest decline on record -- but economists polled by Reuters this week expect it to grow by 0.2 percent in the current quarter.

Germany and France both grew modestly in the second quarter of the year -- exiting recession earlier than most economists had expected.

Taken in the round, the recent data suggest that aggressive monetary easing from the European Central Bank, along with a strong rebound in Asia's economies, may be bearing fruit.

Financial markets agreed the data were optimistic. The euro touched a one-week high against the United States dollar and the pound after the figures were released and euro zone government bond futures fell to a session low.

Outside Europe, Japan has ended its worst recession since World War II, with second-quarter growth of 0.9 percent.

The US continued to contract from April to June but the Reuters poll of more than 250 economists predicted US growth in the third quarter.


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