Eurozone business activity slips, France struggles for growth

(BRUSSELS) - Eurozone business activity slipped slightly in May but held near a three-year high, suggesting a modest economic recovery remains on track, a closely watched survey showed on Thursday.

However the report also highlighted continuing problems for France, lagging further behind powerhouse Germany which goes from strength to strength, analysts said.

"Relatively reassuring for the Eurozone overall but certainly not for France," said Howard Archer at IHS Global Insight.

Analysts said France's problems continue, despite President Francois Hollande's recent government makeover, and were adding to wider deflation pressures which the European Central Bank must counter.

Deflation, an outright fall in prices, can be fatal as people put off purchases in the hope they can buy cheaper later.

That dampens demand, leading companies to put off investment, which in turn hits wages and jobs, and so demand again, setting off a vicious downward spiral.

Markit Economics said its May Eurozone Composite Purchasing Managers Index (PMI), a leading economic indicator, slipped to 53.9 points from 54 in April.

The composite indicator was at the second-highest level of the past three years, and the average for the second quarter so far was running at its best since the three months to June 2011 period, Markit said.

Germany was at 56.1 points while France fell back under the 50-points boom-bust line at 49.3.

The May services sector PMI hit a 35-month high of 53.5 points, up from 53.1 in April, while the manufacturing PMI fell to 52.5 points, a six-month low, from 53.4 in April.

The report was welcome after overall economic growth in the 18-nation eurozone slowed unexpectedly to 0.2 percent in the first quarter, well short of forecasts for 0.4 percent.

Markit chief economist Chris Williamson said the slight PMI easing in May "doesn't change the picture of a region that's enjoying its best spell of growth for three years."

The figures suggest the eurozone economy could grow "0.5 percent in the second quarter after the lacklustre 0.2 percent rise in the first three months," Williamson said.

However, there were two concerns, he said, deflation pressures and a struggling France.

"Of greatest concern is France, living up to its moniker of 'sick man of Europe' by sliding back into contraction as Germany continues to enjoy robust growth" at its best since mid-2007, he said.

- Deflation threat remains -

Archer said the report was "relatively reassuring news for hopes that (a) modest eurozone economic recovery remains intact."

However, "the eurozone is clearly not finding it at all easy to build up growth momentum," he added.

Jessica Hinds at Capital Economics said the report suggested the eurozone recovery "remains lacklustre" and also highlighted the divergence between France and Germany.

The May figures were consistent with second-quarter economic growth of 0.4 percent, Hinds said, but that "will still not be strong enough to eliminate the risks of deflation."

ECB head Maria Draghi and other officials have made clear in recent weeks that they expect to take further measures in June to boost the economy to head off the deflation threat.