LONDON - 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 on Friday.

Markit's Composite Purchasing Managers Index (PMI) 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 three 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.

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 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 Two, with Q2 growth of 0.9 percent. The United States continued to contract from April to June but the Reuters poll of more than 250 economists predicted U.S. growth in Q3.


Euro zone services companies were at their most optimistic since April 2007, before the financial crisis began, as separate surveys of over 4,500 service and manufacturing firms showed business activity was far greater than economists had expected.

But that has not yet stemmed European job losses, something economists point to as the main threat to a durable recovery.

The PMI composite employment index rose this month to a 10-month high but remained solidly in negative territory, indicating firms are still slashing payrolls as they battle to cut costs and stay afloat.

With governments' stimulus packages further unfolding their full impact and, above all, the pick-up in global activity, GDP growth could finally turn positive again in Q3, said Carsten Brzeski, economist at ING Financial Markets.
Nevertheless, it is far too early to give the all-clear for the euro zone economy. As long as worsening labour markets hamper private consumption, export-oriented euro zone countries with competitive positions in world markets will be the big beneficiaries. Other euro zone countries risk lagging behind.

Deutsche Telekom's business client unit said last week it would shed 3,000 jobs while Ford has told unions it wants 600 redundancies at its plant in Valencia, Spain.

ECB governing council member Axel Weber said on Wednesday the low point in the German job market was unlikely to be reached before the end of 2010 or early 2011 and warned the danger of a temporary reversal of economic recovery was high.

It is too early to rein in the measures to support the economy. The stimulus programmes worked and we were able to limit the impact of the crisis, he said. (Editing by Mike Peacock)