By Jonathan Cable
LONDON (Reuters) - A recovery in euro zone business activity was weaker than expected this month as a deepening contraction in the bloc's manufacturing industry is increasingly holding back services firms, a survey showed.
Last month, European Central Bank President Mario Draghi raised the prospect of more support for the struggling euro zone economy if its slowdown persists and Thursday's survey is likely to add to the concerns of policymakers.
IHS Markit's Flash Composite Purchasing Managers' Index (PMI), which is considered a good guide to economic health, only nudged up to 51.6 this month from a final April reading of 51.5, below the median expectation in a Reuters poll for 51.7.
"It's not only that current growth is brittle, as the surveys suggest. There are also downside risks to the outlook going forward," Morgan Stanley (NYSE:MS) economists wrote to clients.
"We expect a dovish message at the central bank's June meeting."
Earlier figures from Germany showed activity contracted for a fifth consecutive month in May, reflecting the toll unresolved trade disputes are having on Europe's largest economy.
German business morale deteriorated more than expected this month due mainly to a plunge in services sector confidence, an Ifo Institute survey showed on Thursday, also suggesting the economy is losing steam after solid growth at the start of 2019.
In France, the bloc's second-largest economy and the only other euro zone member to report a preliminary PMI, activity reached a six-month high but again trade disputes looked set to ensure growth would remain modest at best.
Traders took Europe's bourses lower as Brexit worries and the gloomy euro zone data played on their nerves.
SLOW GROWTH
IHS Markit said the data pointed to euro zone GDP growth of 0.2 percent this quarter, weaker than the 0.3 percent predicted in a Reuters poll last month.
In part due to factories completing old orders, the small increase in the key composite number was because an index measuring factory output, which feeds into the composite PMI, rose to 49.0 from 48.0.
But the flash manufacturing PMI spent its fourth month below the 50 mark separating growth from contraction, falling to 47.7 from 47.9 and disappointing expectations for a rise to 48.1.
Suggesting factory managers are growing increasingly pessimistic, they cut staffing levels for the first time since August 2014. The employment index dropped to 49.0 from 50.7.
The manufacturing PMI means the sector would have a 0.1-0.2 percentage point drag on an economy currently being supported by a struggling services industry, IHS Markit said.
"Concerns about manufacturing persist. The service sector continues to keep the economy afloat but at a slightly slower pace," said Bert Colijn at ING.
Growth in the bloc's dominant services sector slowed and its flash PMI fell to 52.5 from 52.8, confounding expectations in a Reuters poll which predicted a modest rise to 53.0.
New export business -- which also includes trade between member countries in the bloc -- among services firms was hurt by weaker global growth, trade tensions and Brexit. The sub-index fell to 48.1 from 48.7, one of the weakest readings since IHS Markit began collecting the data in late 2014.
With forward-looking indicators painting a disappointing picture -- overall new orders were flat, hiring slowed and backlogs of work were run down -- optimism was at its lowest since October 2014.
The composite future output index fell to 58.8 from April's 60.4.
