(March 21): Euro-area private-sector activity rose to a nine-month high, masking sustained weakness in the bloc’s top two economies.

Data on Thursday showed S&P Global’s purchasing managers’ index (PMI) increased to 49.9 in March, stronger than the 49.7 predicted by economists and the closest to the 50 level that marks expansion since June.

That’s all down to services, which gained more momentum than anticipated by economists, while the manufacturing gauge unexpectedly dropped to a three-month low.

The stabilisation of the headline PMI number masks a dire situation in Germany and France, which fell short of other euro-area members, pointing to an uneven economic picture, according to Hamburg Commercial Bank.

The 20-member currency region avoided a recession at the end of last year, though economists predict growth of just 0.1% in the first quarter and an output boost of only 0.5% for the year.

“If you were hoping for a recovery in the manufacturing sector in the first quarter, it’s time to throw in the towel,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “However, there is a glimmer of hope. Companies remain optimistic about future production.”

He highlighted that “comparing France and Germany, the composite PMI data show almost the same degree of weakness.”

France’s private-sector economy shrank at a slightly quicker pace this month than in February, and while Germany’s downturn eased, this was solely due to the services sector, which came close to stagnation.

Important German manufacturers again defied economists’ expectations for improving momentum, with the relevant index declining to 41.6 from 42.5 in February.

“Germany is not getting back on track,” said de la Rubia. “The manufacturing sector closed the first quarter of 2024 with a disconcerting rate of contraction, echoing the woes of the previous month.”

The deterioration in France was due to worsening demand for goods and services. Respondents cited “client hesitancy, challenging economic conditions and inflationary pressures” as drags, according to S&P Global.

The two economies have recently fared worse than the broader euro area, where nations including Spain have been growing at a solid pace. Germany is by contrast probably in recession after a contraction in the fourth quarter that it’s struggled to shake off at the start of 2024.

The surveys still found that companies are becoming more optimistic about the future, a signal that the rebound that economists are predicting will arrive eventually.

In France, national indicators published on Thursday showed an improvement in business confidence in both industry and services. The composite reading for all sectors measured by statistics agency Insee reached its long-term average of 100 in March for the first time since September.

While there were signs of easing price pressures in both countries, rising salaries remained a concern — especially for services firms, where labor costs are playing a bigger role.

“The European Central Bank [ECB] can take some comfort from the fact that price pressures in the wage-sensitive services sector have not increased further,” de la Rubia said. “However, price pressures remain elevated. Therefore, the PMI price news is not enough to change the ECB’s apparent plan to cut rates in June rather than April.”

“The broader picture is that while output is struggling to expand, it’s still far from collapsing. That will buy the Governing Council some time before lowering interest rates. We expect the first interest-rate cut to come in June,” said David Powell, economist at Bloomberg Economics.

Separate UK data showed Britain’s private sector firms continued to report output growth in March, adding to evidence that a rebound from last year’s recession is underway.

US data later on Thursday are expected to indicate further growth. Earlier numbers from Australia and Japan showed stronger expansion.

PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.