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Germany, Britain shine but Europe's recovery still fragile

A statue depicting European unity is seen outside the European Parliament in Brussels September 5, 2013. REUTERS/Francois Lenoir
A statue depicting European unity is seen outside the European Parliament in Brussels September 5, 2013. REUTERS/Francois Lenoir

By Andy Bruce

LONDON (Reuters) - The euro zone's economic recovery lost a little momentum last month, according to surveys that showed only modest growth in German and French businesses.

Data from non-euro zone Britain impressed again, however, and German industrial orders jumped underlining the uneven nature of overall European recovery.

Wednesday's purchasing managers' indexes (PMIs) from Markit showed the pace of growth in euro zone businesses slipped last month, although not nearly as badly as first projections.

Taken as a whole, the indexes pointed to fragile economic growth that will do little to ease the pressure on the European Central Bank to take some action, although not perhaps at its policy meeting on Thursday.

With surprisingly low inflation last month, speculation in markets and among economists has grown that the ECB is primed to stimulate the economy again - perhaps next month.

"Our view is that rates will remain on hold tomorrow although we expect that ECB President (Mario) Draghi will 'disclose' that a rate cut was considered," said analysts at Rabobank, after the PMIs.

Financial markets also question what effect a straightforward interest rate cut would have given that rates are already at record lows.

Overall, the tone of the data on Wednesday were mixed. German industrial orders rose at a far faster pace than expected in September, but euro zone retails sales slipped more than predicted during the same month.

By contrast, British indicators added to evidence the UK is spearheading Europe's recovery from recession.

UK industrial output in September came in much better than the Reuters consensus, following on from Tuesday's upbeat business surveys.

The Bank of England meets on Wednesday and Thursday and is not expected to change policy, having said it will keep interest rates at their record low until unemployment falls to 7 percent.

Economists expect the Bank to bring forward its expectation for when that will happen - currently late 2016 - when it publishes new forecasts next week.

The euro tip-toed away from a seven-week low on Wednesday after the data, as talk of extending the lifespan of the U.S. Federal Reserve's stimulus helped balance expectations of easing by the ECB in coming months.

BETTER THAN HOPED, BUT STILL NOT ENOUGH

Markit's October Eurozone Composite Purchasing Managers' Index (PMI) of activity in both the services and manufacturing sectors slipped to 51.9 in October from 52.2 in September. That marked an improvement on an initial estimate two weeks ago of 51.5, however.

The PMI for the services sector, covering thousands of firms across the euro zone from major banks to hairdressers, slipped to 51.6 from September's 52.2. Again, that was higher than the preliminary reading of 50.9.

Readings above 50 indicate expansion in activity.

While the modest pace of growth in activity at German and French companies was unchanged last month, it dwindled at Italian services firms and activity declined again in Spain.

"The loss of momentum raises concerns that the upturn is faltering and piles further pressure on the European Central Bank to reinvigorate the recovery," said Chris Williamson, chief economist at PMI compiler Markit.

The ECB is likely to resist pressure for an interest rate cut on Thursday despite a dive in inflation to 0.7 percent in October, close to a four-year low and far below its target of close to 2 percent.

Companies continued to trim prices charged to customers at a steady pace last month, the PMI showed, suggesting little chance inflation will edge higher.

The surveys brought more bad news on the labor front as companies cut jobs at a faster pace in October.

Data last week showed euro zone unemployment hit a record 12.2 percent in September.

Ireland's services PMI was one of the few unambiguously positive surveys from Wednesday's euro zone batch, Markit said, showing the strongest growth since 2006.

(Additional reporting by William Schomberg and Christina Fincher; Editing by Ross Finley/Jeremy Gaunt)

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