KEY EURO-ZONE services and manufacturing indices rose in March but analysts warned the economy may see a sharper contraction in the first quarter than the contraction of 1.5 per cent in the last three months of 2008.

Markit said yesterday its Flash euro-zone purchasing managers’ index (PMI) for the dominant service sector rose to 40.1 in March, well below the 50 mark where growth begins but ahead of February’s 39.2 and considerably above expectations for 39.0.

Factories in the euro zone also saw a slowing in the rate of decline with the flash manufacturing PMI rising to 34.0 from 33.5 in February and above the 33.4 expected by economists.

However, the PMI levels were still below readings in the last months of 2008, leading many analysts to conclude that any significant slowing in the pace of deterioration would not come until the second quarter.

The upturn in both sectors took the combined composite index to 37.6 from February’s 36.2 and above the 36 which had been predicted, as global efforts to combat recession by boosting government spending and cutting borrowing costs begin to help.

Service sector firms were a little less pessimistic about the 12-month outlook with the business expectations index rising to 47.5 from February’s 46.1.

The fall in new manufacturing orders was also a little less steep, with that index rising to 30.7 from 28.2 in February, while the stocks of finished goods index slumped to a record low, suggesting firms were managing to shift old stock.

Even so, companies battling against sinking demand and banks’ reluctance to lend have been forced to slash jobs to cut costs and stay afloat.

The composite employment index, which measures employment broadly in the euro area, dropped to 40.3, a record low for the 10-year-old index, from 40.8 in February. Expectations of another European Central Bank rate cut will be reinforced by data showing input price pressures across the bloc fell to record lows.