European economies showed signs on Thursday that the worst recession in six decades was easing, but U.S. predictions of a hard road to recovery haunted global markets and fed fears of rising unemployment.
Markit's Eurozone Flash Services Purchasing Managers Index (PMI), a measure of service and manufacturing activity, rose to 44.7 in May from 43.8 last month, beating the consensus estimate of 44.5. That marked the third month in a row it had picked up and took it to its highest level since October.
However, predictions by some economists of a return to growth as early as the last quarter of this year are tempered with concerns data may yet obscure more complex underlying weaknesses in the economy. The PMI index was still below the 50 mark which separates growth from contraction.
"It is grounds for hope that things will improve over the next few months," said Peter Dixon, an economist at Commerzbank. "I'm not getting carried away by … (the figures), but equally they are a sign that the economy has pulled out of the nosedive that it was in towards the end of last year."
A recent general global recovery in financial markets, from very low levels, is not being reflected in unemployment figures which continue to rise sharply. Spain, for instance, is suffering a 17 percent jobless rate and recorded a larger than expected contraction in its economy in the first quarter
The FTSEurofirst 300 index of top European shares fell some two percent, largely on a U.S. Treasury decision to lower its growth forecast for the next three years. Asian stocks also dipped, Tokyo shares leading the decline with a 0.9 percent drop as the dollar's retreat pressured exporters.
Treasury Secretary Timothy Geithner said the U.S. financial system, epicentre of the global economic crisis that spread from the U.S. housing market last year, was beginning to heal. However, he said, the economy was fragile.
The Fed cut its 2009 forecast to project a 1.3-2.0 percent contraction, deeper than the 0.5-1.3 percent decline seen in January.
It expects the world's biggest economy to return to 2-3 percent growth next year. But its new unemployment forecast shows the jobless rate will stay above 9 percent until 2011, suggesting it will take a long time before any recovery will work through the economy.
The dollar hit its lowest level in five months against a basket of six major currencies.
Economists have said falling inventories of oil and metals and a reduced number of unsold homes indicate the recession may be easing, but the question remains whether this reflects a return of real demand or a running down of stocks.
CHINESE CONFIDENCE
The Markit PMI index showed France's economy performing more strongly than the euro zone as a whole.
The data exceeded expectations for the third straight month, Markit said, signalling that a recovery in France could be earlier than current predictions for a rebound in the fourth quarter.
"Certainly the PMIs are suggesting that we'll see a return to economic growth in the second half of the year, possibly in the early part of the second half, so Q3," said Chris Williamson, chief economist at Markit.
The PMI for the manufacturing sector climbed to 43.1 in May from 40.1 the previous month, beating forecasts for a reading of 41.0 and reaching its highest level since last August.
The rate of decline in the private sector in Germany, Europe's largest economy, eased to its slowest in seven months.
The S&P ratings agency offered a gloomy appraisal of the British economy. It said public finances were deteriorating rapidly and the debt burden could approach 100 percent of Gross Domestic Product and remain at that level in the medium term.
British retail sales, some measure of the mood in the economy, rose more than expected in April. But government borrowing hit a record high for the month of April.
Markets will be watching for signs of improvement in the U.S. economy with publication of the Philadelphia Fed's business activity index later on Thursday.
Singapore, a small Southeast Asian economy heavily exposed to international trade and thus seen as a good proxy for global economic trends, reported a 10 percent annual contraction in its revised first quarter data on Thursday.
One source of hope for economies across Asia have been signs that China, the world's third-largest economy, was riding out of its soft patch early this year with the help of Beijing's $585 billion stimulus package.
Chinese officials have been expressing growing confidence that the official 8 percent growth target for this year was within reach. But analysts at two international banks said on Thursday there were some signs that China's recovery had recently lost some steam.
Fitch Ratings also warned about the side effects of the credit boom, saying Chinese banks risk pouring money into investment projects with dubious earnings prospects as they rush to make up for shrinking margins by boosting loan volumes.
