Euro zone business growth loses pace but unemployment dips

By Jonathan Cable

LONDON (Reuters) - Euro zone business growth lost a little momentum last month despite companies cutting prices, but unemployment has fallen across the bloc with firms taking on staff to meet existing demand.

The deceleration in growth will be disappointing for the European Central Bank, which is expected to leave policy unchanged later on Wednesday, coming just a few months after it embarked on a trillion-euro quantitative easing programme to try to drive growth and fuel inflation.

"The economy is in better shape than it was last year due to a combination of lower oil prices, weaker exchange rate and improvement in confidence," said Ken Wattret at BNP Paribas.

"But some of those effects have begun to fade - the exchange rate has rebounded somewhat, the oil price has rebounded somewhat and the enhancement effect of the QE programme has worn off a bit."

Aided by the triple-booster of cheaper oil, ECB asset-buying and the rise in the dollar exchange rate, euro zone countries are expected to post GDP growth of 1.4 percent this year and 2.1 percent next year, the OECD said on Wednesday.

That is an upward revision from the respective 1.1 and 1.7 percent forecasts the think tank made in November and compares with a Reuters poll last month that predicted 1.4 percent growth this year and 1.8 percent next. [ECILT/EU]

Markit's final composite Purchasing Managers' Index, seen as a good guide to growth, stood at 53.6 in May, above an earlier flash reading of 53.4 but below April's 53.9. A reading above 50 implies growth. [EUR/PMIS]

To stimulate business, firms have been cutting prices since April 2012 but did so last month at the weakest rate in nearly a year, according to the PMI. Official data on Tuesday showed prices in the bloc rose 0.3 percent last month.

With prices still falling the bloc's dominant service industry performed slightly better than previously thought while official data showed retail sales rose 0.7 percent in April having sunk 0.8 percent the month before.

Unemployment fell to 11.1 percent in April, official data showed on Wednesday, and should fall further last month as the PMI showed service firms increased headcount at the fastest rate since November 2010.

But in Britain, outside the bloc, growth in its service sector suffered its sharpest slowdown in nearly four years in May, according to a survey which suggested a recent cooling of the economy might last longer than previously thought. [GB/PMIS]

"The unexpected fall in May's Markit/CIPS report on services shows that the economic recovery still looks a bit fragile, but the big picture is that growth in the sector remains pretty healthy," said Vicky Redwood at Capital Economics.

The Bank of England was unanimously expected in a Reuters poll to leave interest rates at a record low of 0.5 percent when it meets on Thursday and not begin tightening policy until earlier next year. [BOE/INT]

In what could be the ECB's least eventful meeting in months on Wednesday markets will be scrutinising President Mario Draghi's comments for the central bank's latest views on the economic outlook and the Greek crisis.

Greece's creditors on Tuesday drafted the broad lines of an agreement to put to the leftist government in Athens in a bid to conclude four months of acrimonious negotiations and release aid before the cash-strapped country runs out of money.

(Editing by Jeremy Gaunt)