Euro zone activity picks up sharply in August

The sun shines behind the euro logo outside European Central Bank in central Germany, on August 1, 2013.

Euro zone activity picked up sharply in August to a 26-month high as the battered economy climbed out of a damaging recession, a closely watched survey showed on Thursday.

Analysts said the report confirmed that the 17-nation euro zone was finally turning the corner after a downturn made worse by a debilitating debt crisis cost millions of jobs and tested the single currency bloc to the limit.

But, there was some concern that France, ranked second to powerhouse Germany in the euro zone, continued to struggle and actually slipped back.

The Composite Purchasing Managers' Index compiled by Markit Economics jumped to much better-than-expected 51.7 points in August from 50.5 in July, pushing further beyond the 50-points boom-or-bust line.

Analysts polled by Dow Jones Newsires expected an August reading of 51 points after the Composite PMI moved into positive territory in July for the first time in 18 months.

Markit said its separate PMI for the services sector — which accounts for the bulk of economic activity — rose to 51 in August for a 24-month high, from 49.8 in July.

The manufacturing sector PMI hit a 26-month high of 51.3 points, up from 50.3 in July.

Data last week showed that the 17-nation euro zone grew 0.3 percent in the second quarter compared with the first, signaling the end of a recession which lasted a record six quarters.

The PMI report on Thursday showed this recovery was gaining momentum, Markit chief economist Chris Williamson said.

"So far, the third quarter is shaping up to be the best ... since the spring of 2011," Williamson said, cautioning that the bloc was not yet entirely in the clear.

"The upturn is being led by Germany, where growth accelerated again in August, driven in turn by rising domestic and export demand," he noted.

"A big question mark still hangs over France's ability to return to sustained growth," he said, with domestic demand "lackluster."

At the same time, it was positive that data from the weaker euro zone countries "continued to improve ... suggesting that a long-awaited recovery seems to be taking shape," Williamson said.

For Jonathan Loynes of Capital Economics, the Markit report was further evidence that the euro zone "continued to expand in the third quarter, albeit at a pretty modest pace."

The report suggested third-quarter economic growth of around 0.2 percent, slower than in the second, Loynes said.

Of some concern was the divergence between Germany — its Composite PMI rose to 53.4 points from 52.1 in July — and France, which actually fell from 49.1 points to 47.9, he said.

That could mean that the much stronger-than-expected second quarter French growth of 0.5 percent will prove to "have been a blip," he said.

Loynes cautioned too that if the euro zone was indeed expanding again, "growth remains a long way short of the rates required to start to address the region's debt crisis."

Martin van Vliet of ING Bank's Global Economics said the report backed the view that the recovery was becoming more broad-based, even if France was lagging behind.

The upturn, however, "will likely be a slow and uneven process," van Vliet said, arguing that tight credit, a tough fiscal stance and high unemployment will keep domestic demand subdued.

A slowdown in major emerging markets may additionally hurt exports, he said.