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Euro zone growth slows, orders dry up: PMIs

By Jonathan Cable

LONDON (Reuters) - European services growth slowed in June in the face of sluggish new orders and rising interest rates, giving firms less optimism about the year ahead, business surveys showed on Tuesday.

The euro zone service sector grew at its weakest pace since October with an unexpectedly deep contraction in Italy and smaller euro zone countries masked by resilience in Germany and France.

In Britain, the Markit services purchasing managers index (PMI) showed growth was still not strong enough to generate any meaningful increase in employment.

The monthly surveys echoed earlier data from China, which showed growth in its fledgling services sector slowed slightly in June, and data due from the United States on Wednesday are also expected to highlight weaker growth.

Still, the European Central Bank is expected to raise interest rates for the second time in four months on Thursday even though the PMI data provide little reason to do so.

"The rate at which growth appears to be easing off will only raise concerns that the current trend may amount to more than a usual cyclical slowdown," said Janet Henry, economist at HSBC.

"We continue to expect that the ECB, following the signaled increase expected for July, will slow down the process of interest rate normalization, with the next rate rise not expected until November."

Markit revised down sharply its June PMI to 53.7 from 54.2, which was already down substantially from 56.0 in May.

The composite PMI, which combines the services and manufacturing data published last week, fell to 53.3, its lowest level since October 2009.

Markit said the data suggested second quarter economic growth of 0.6 percent, slower than 0.8 percent in the first quarter. That loss of momentum does not bode well for the current quarter that just began either.

"All of it together suggests that the underlying pace is slowing, it is more than the temporary slowdown the ECB has been previously advocating," said Ben May at Capital Economics.

GLOBAL GROWTH SLOWING

Figures released last week showed the global manufacturing sector, a key driver of economic growth, lost steam for a second month running in June.

Despite the slowdown, central banks have turned their focus to controlling inflation, unwinding ultra-loose monetary policies adopted in the depths of the financial crisis.

Sweden's Riksbank raised rates on Tuesday and stuck to its forecast for further increases despite signs the economy is cooling.

The People's Bank of China, keen to put a lid on price rises, has increased the reserve requirement ratio for banks nine times and raised interest rates four times since October.

Earlier data from France and Germany showed composite PMIs slipped to eight-month lows while Spain's services PMI retreated perilously close to the 50 break-even mark. Italy's services PMI fell below 50 for the second time this year.

The service sector PMI in Germany, Europe's largest economy, recorded the largest downward revision from the flash reading since January 2008, thanks in part to worries about the global economic outlook.

Greece, meanwhile, faces years of economic purgatory after being forced to bow to the EU and IMF for a second time to try and get its public finances in order.

Ireland and Portugal are not faring much better.

Euro zone services business expectations hit a two-year low -- down to 62.8 from 65.2 in May -- as firms worried about the global economic recovery and a tail-off in orders.

"It's a global economy which is still expanding but the recovery is quite patchy at the moment and there is a lot of uncertainty still around," said Mark Miller, global macroeconomist at Lloyds Bank Corporate Markets.

(Additional reporting by Kevin Yao in Beijing; Editing by Ruth Pitchford)

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