Spain's Service Sector Grows For 1st Time Since Dec '07

Spain's service sector grew for the first time in more than two years in March as new orders grew, though the outlook remained downbeat, a widely watched survey showed on Wednesday.

An unexpected rise in the survey, coupled with a return to growth in the manufacturing sector last month, fuelled hopes the economy grew in the first quarter after contracting by 3.6 percent in 2009.

Markit's Purchasing Managers Index for Spain's dominant services sector rose to 51.3 in March from 47.1 in February, the first time the index has been over the 50 line that separates growth from contraction since December 2007.

It was also the highest level since October 2007 and way above economists' forecasts of 48.3.

The jump was largely powered by a rise in the new business index measuring new orders, which rose to 52.7 from 49.8 in February, Markit said -- its highest level since September 2007.

"The first rises in activity and new orders for more than two years are hopefully a sign of better things to come in the Spanish service sector," said Andrew Harker, economist at data provider Markit. But he cautioned that one positive month did not yet confirm a recovery was under way.

Indeed, the prices charged index remained well below the 50 mark, showing that companies in the services sector were still slashing costs in the face of weak demand. They were unable to pass on higher energy costs, with the input prices index rising sharply.

The sector was still some way off creating new work, though the data showed a slowdown in the pace of job cuts, taking the employment index to its strongest level in two years.

The Bank of Spain forecasts unemployment will rise to 19.4 percent in 2010 and to 19.7 percent the following year, nearly twice the current euro zone average. That could well serve to keep the lid on any sharp expansion of the services sector.