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Euro zone slump eases just as debt crisis returns to haunt progress

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(Globalpost/GlobalPost)

By Andy Bruce

LONDON (Reuters) - The euro zone economy looks on track to crawl out of recession in the second half of the year, surveys showed on Wednesday, just as new strains in the region's debt crisis put it all at risk.

Markit's final Composite Eurozone Purchasing Managers' Index (PMI), a monthly survey of thousands of companies, rose to its highest since March 2012 last month, climbing to 48.7 from May's 47.7.

This is still below the 50 threshold for growth, but a marked improvement from lows hit last autumn. Overall, the PMIs were consistent with the euro zone economy shrinking around 0.2 percent through April to June.

While this suggested the euro zone's record-long recession may end soon, a wave of political instability in Portugal and a new bout of worry about Greece were reminders of how easily the debt crisis, dormant for the last 10 months, can reawakened.

The resignation of two senior ministers in Portugal prompted a huge sell-off in the country's government bonds, sending 10-year borrowing costs soaring above 8.1 percent for the first time since November.

It also pushed yields in Spain and Italy sharply higher.

Greece, meanwhile, has been given just a few by international lenders to deliver on conditions attached to its bailout in order to receive its next tranche of aid.

The PMIs showed German companies managed to eke out negligible growth in June, but the surveys showed the region's peripheral economies, like Spain and Italy, still suffered a perilous rate of decline - which worsened in the case of Italy.

"The peripheral economies have a very hard battle on their hands to return to healthy economic growth," said Jonathan Loynes, chief European economist at Capital Economics.

"Against that background, I don't think it's at all surprising to see political instability in those countries."

ECB IN FOCUS

None of this will be lost on European Central Bank policymakers, who meet on Thursday to set monetary policy.

Although economists do not expect them to announce any major changes, any sign of a new flare up in the debt crisis could force the bank into action in the coming months.

"This may well mean that the ECB at some point down the line may have to implement its OMT program in order to prevent borrowing costs from continuing to rise," Loynes said.

He was referring to the Outright Monetary Transactions plan to buy the bonds of struggling countries in some circumstances. The announcement of such a plan settled markets without it having to be triggered.

Portugal, however, does not currently meet the OMT criteria for help, adding to the debt market ructions.

Even if the euro zone manages to avoid a major bout of debt jitters and to escape recession in the current quarter, a return to outright growth looks a way off yet.

"The concern is that, with Germany barely growing, it remains difficult to identify any real growth drivers," said Chris Williamson, chief economist at Markit, which compiles the PMIs.

He added that any economic expansion was likely to remain subdued until business confidence improves further and unemployment falls from its record euro-era high of 12.2 percent.

Although the survey's jobs index ticked up to 47.4 last month from May's 47.2, that still suggests the jobless rate is likely to head higher.

In non-euro zone Britain, meanwhile, the services sector grew at the fastest pace in more than two years in June, suggesting a strong rate of economic growth there.

(Editing by Jeremy Gaunt.)

http://www.globalpost.com/dispatch/news/thomson-reuters/130703/euro-zone-slump-eases-just-debt-crisis-returns-haunt-progress