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Euro Zone Factory Recovery Broadens, Except For France

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[May 02, 2014]  By Jonathan Cable

LONDON (Reuters)  The recovery in euro zone manufacturing accelerated at the start of the second quarter with solid growth across most of the bloc although French factories struggled to maintain momentum, a business survey showed on Friday.

Growth was again led by Germany, Europe's largest economy, and previously-lagging companies in Spain and Italy reported better business last month.

It was the first time since November 2007 that all PMIs in the region indicated growth  coming in above the 50 break-even level.

But separate data showed euro zone unemployment fell only slightly to 11.8 percent in March, still near a record high, a sign that European households are yet to feel much of the corporate economic recovery.

"Recent economic evidence remains consistent with the European Central Bank's baseline scenario which is that of a gradual recovery," said Philip Shaw at Investec.

"There are concerns about the confidence in France and the extent to which that could restrain economic growth this year and next."

Also of concern to the ECB's Governing Council, which meets next week to set monetary policy, factories cut goods prices for a second straight month  and at a slightly steeper pace.

Official flash data on Wednesday showed euro zone inflation rose to only 0.7 percent last month from 0.5 percent the month before, still well below the ECB's 2 percent target ceiling and within what the central bank regards as a "danger zone".

"With factory gate prices falling for a second month running, policymakers will remain concerned about deflationary forces," Chris Williamson, Markit's chief economist, said.

The bloc is set for at least two more years of low inflation and still faces a very real threat of deflation, a Reuters poll found last month.

Financial markets were little moved after the latest PMI data, trading cautiously as they awaited U.S. employment figures due later on Friday.


The final Eurozone Manufacturing Purchasing Managers' Index rose to 53.4 last month from March's 53.0. That was slightly better than the flash reading of 53.3 and marked the tenth month the index has been above the 50 level that separates growth from contraction.

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The manufacturing output index, which forms part of the overall Composite PMI due on Tuesday, jumped to 56.5 from 55.6, in line with the flash reading.

"Improved manufacturing activity in April suggests that euro zone economic recovery is continuing to gradually firm following likely modestly improved GDP growth in the first quarter," said Howard Archer at IHS Global Insight.

An earlier PMI from Germany showed improving growth. Italy's PMI soared to a three-year high and Spain's slipped just one basis point from March's near four-year high.

France's main index slumped to 51.2 from 52.1, although still holding above the break-even level for a second month.

President Francois Hollande, who has seen his popularity plummet amid weak economic growth and rising joblessness, plans to phase out 30 billion euros ($42 billion) in payroll taxes on companies in exchange for them committing to hiring targets.

In Britain, which does not use the euro, the construction sector expanded for the 12th straight month in April, albeit at the slowest rate in six months.

(Editing by Toby Chopra)

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