RTTNews - The Eurozone private sector economy showed signs of broad stabilization as the Purchasing Managers' Index hit the threshold level for August. A return to growth in manufacturing output and slowing rate of contraction in the service sector led to the stabilization.

The Flash Eurozone Composite Output Index rose to 50 in August from 47 in July, a survey from the Markit Economics showed Friday. Economists had expected the index to edge up to 48 in August. The latest reading marked the end to a fourteen-month stretch below the no-change mark of 50.

A reading above 50 indicates an expansion in the private sector activity, while a level below 50 suggests contraction.

Since its record low witnessed in February, the headline reading improved for each of the last six months. The increase seen in August was the greatest in the series history.

The Flash Purchasing Managers' Index for the manufacturing sector stood at its 14-month high of 47.9 in August, rising from 46.3 in July. The expected reading was 47.5.

Meanwhile, the services PMI came in at 49.5, up from 45.7 in July. The services activity index posted its highest reading in the current fifteen-month sequence of contraction and stood above the expected 46.5.

According to survey results, the contraction rate in new business continued to ease and was the weakest for fifteen months in August. The trend in new export orders also showed signs of potential recovery.

Looking forward, confidence in service sector strengthened to reach a 28-month high and manufacturers continued to deplete inventories at a record rapid rate. Further, the rate of fall in employment was the weakest since last October.

Deflationary pressures eased in both the manufacturing and service sectors, with the slower reduction in costs at service providers. The rate of decline in input costs in August was the weakest in nine months, while output prices dropped at the least marked pace in 2009-to-date.

Rob Dobson, Senior Economist at Markit said, PMI data are signaling that the unprecedented downturn has been followed by a historically rapid rebound that positions the Eurozone to post growth of GDP in the third quarter.

The Eurozone economy contracted slightly in the second quarter even as Germany and France emerged out of recession. The economy shrank 0.1% sequentially in the second quarter, which was much slower than the 2.5% decline seen in the first quarter.

Separate survey results from Markit showed that private sector activity improved in both Germany and France in August.

The Markit Flash German Composite Output Index stood at 54.2 in August, the highest reading for fifteen months. The index reading for July was 49. The manufacturing PMI moved up to 49 from 45.7 in July, while services PMI rose to 54.1 from 48.1 last month.

At the same time, Markit/CDAF Flash French composite output index also exceeded the threshold limit for the first time in fifteen months with the August reading at 50.9. The manufacturing PMI rose to 50.2 in August from 48.1 in July and services PMI climbed to 48.9 from 45.5 in July.

Commenting on Eurozone PMI data, Christoph Weil, analyst at Commerzbank said the 16-nation bloc will expand strongly in the second half of 2009. The industry is benefiting primarily from the reversal of the inventory cycle and recovering external demand. The situation seems to have eased in the service sector too.

Analyst said the next ECB move will be to hike interest rates. To minimize the risk of choking off the economic recovery, the central bank would possibly wait until summer. Aftershocks of the financial crisis will be felt for some time yet. Once the inventories have been restocked, the euro area economy will expand much more slowly again. At 1.5% in 2010, the growth in the Eurozone economy would still fall short of its long-term average.

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