European services and industry data on Friday suggested the worst downturn in 80 years was easing, but a record economic decline in Britain and gloomy company outlooks cast doubt over any quick recovery.
Governments have pumped trillions of dollars into corporate rescues and stimulus packages to jolt the global economy out of its downturn, but analysts said there may not be enough demand to support a sustained recovery when extra funds are withdrawn.
Euro zone services and manufacturing sectors contracted much less sharply than expected in July, but firms continued to slash jobs in a bid to reduce costs, key surveys showed.
"Today's figures are welcome but, fundamentally, still indicate that the euro area is firmly in recession," Daiwa SMBC's Colin Ellis said. Analysts warned that increased activity in manufacturing or services owes more to businesses restocking empty warehouses and retailers discounting to boost sales than a recovery in demand.
"There are considerable questions over sustainability, inventories are an issue here," said Deutsche Bank's Mark Wall.
"We are enjoying a positive impulse now but on a medium-term base we question whether it's got durability."
Those concerns were supported by British data showing that the economy shrank more than twice as fast as expected in the second quarter, registering its biggest annual decline on record and quashing hopes of an early recovery in Britain.
The figures are likely to boost expectations that the Bank of England will pump more money into the economy, which has shrunk by 5.7 percent since the first quarter of last year.
"Today's figures are fresh evidence of the sheer scale of the global downturn we're fighting," Britain's junior finance minister, Liam Byrne, said. "But they also show the pace of slowdown is easing compared to the winter, which is why we remain cautious but confident that growth will return toward the end of the year."
SUSTAINBILITY ISSUES
Global markets took heart from the European data but policymakers were quick to caution against premature optimism, with mixed news emerging from different nations.
Germany showed an improvement in services and manufacturing, and a key business sentiment index rose for the fourth month running in July, to reach its highest level since October 2008.
The downturn in French private sector activity deepened in July, however, while Spanish second-quarter unemployment rose to its highest level in more than a decade.
Austria's central bank said the economy would shrink 4 percent in the second and third quarters compared with the same periods last year.
European Central Bank Executive Board member Jose Manual Gonzalez-Paramo said euro zone interest rates would only be changed once recovery was certain.
"We've seen some signs that there has been a change in trend, but we've seen positive figures and not so positive figures, so we can't say the trend has changed," he said.
"All the measures we've taken have been to restart credit. This hasn't happened yet but it takes time," he added.
That view was reaffirmed by officials from emerging markets.
The European Bank for Reconstruction and Development said emerging Europe may not return to the high growth rates and record investment levels it enjoyed before the crisis, while China warned that the apparent recovery remained fragile.
"We will unswervingly continue to implement an appropriately relaxed monetary policy," China's central bank said on Friday.
CHALLENGING YEAR
European macro data eclipsed weak earnings from Microsoft and American Express overnight to help European shares reverse early losses ahead of the U.S. open.
Stock futures pointed to a mixed open on Wall Street, with some disappointing results curbing sentiment, including Schlumberger, the world's largest oilfield services provider, which posted a sharp drop in earnings and said it saw no rebound in customer spending this year.
Black & Decker, however, posted better-than-expected quarterly profits and raised its 2009 forecast, citing better sales.
The FTSEurofirst 300 index of top European shares was up 0.06 percent at 1245 GMT, after gains in Asia helped by a strong quarterly performance from electronics giant Samsung.
Vodafone, the world's largest mobile phone firm by revenues, reported a slight decline in quarterly organic sales and restated its full-year outlook, lifting its shares.
However, Ericsson, the world's biggest supplier of cellphone network equipment, said the economic downturn was now taking a bigger toll on its market.
While a boost from government stimulus measures has helped some companies beat forecasts for second-quarter earnings, analysts warned the rally may not last, as prices have risen fast and the economic outlook remains mixed.
"The rally over the past two weeks has been very fast and the market is now dangerously overbought. We're due for a pause, which would be healthy if we want to keep the upside trend," said Alexandre Le Drogoff, technical analyst at Aurel BGC.
