Euro zone businesses enjoy brisk start to second quarter

By Jonathan Cable and Sumanta Dey

LONDON (Reuters) - Euro zone business activity picked up at its fastest pace in almost three years at the start of the second quarter, surveys found, while retail sales showed a surprise pick up in March.

The upbeat data will ease fears the euro zone could tip into deflation and could mute some voices calling for fresh policy action by the European Central Bank to spur growth.

The Organisation for Economic Cooperation and Development joined that chorus on Tuesday, saying the ECB should cut its main interest rate to zero and keep it there for at least 18 months to counter persistently low inflation.

The ECB has so far shrugged off calls for extra stimulus.

Economists polled by Reuters ahead of the bank's monthly policy meeting on Thursday expected it to keep its main policy rates at 0.25 percent and also said March's 0.5 percent reading was as low as euro zone inflation would go. [ECB/INT]

Inflation in the 18 countries that use the euro nudged up to 0.7 percent in April. Markit's PMI surveys on Tuesday showed a slight acceleration in input costs, which coupled with a strengthening economy, may ease concerns about disinflation. But price rises remain muted.

"Very low underlying inflation and large economic slack are expected to persist for several quarters," the OECD said in its twice-yearly economic outlook for the currency bloc.

"Accordingly, the main refinancing policy rate should be reduced to zero, and possibly the deposit rate to a slightly negative level, and they should be maintained at these levels at least until end-2015."

The OECD forecast euro zone consumer inflation would fall back to 0.7 percent this year before accelerating to 1.1 percent in 2015 - still far from the ECB's near 2 percent target and below Reuters poll forecasts last month of 0.9 and 1.3 percent.

Policymakers are expected to wait for updated forecasts from the ECB's own staff in June before deciding whether to act.

"With recent figures confirming the image of a gradual improvement of the economy, with now also domestic demand contributing to the expansion, the ECB will be happy to sit on its hands even though inflation remains uncomfortably low," said ING economist Peter Vanden Houte.

Retail sales data were also modestly upbeat, defying expectations of a fall. They rose on the month in March driven by sales of food, drinks and tobacco, although spending patterns differed widely across the bloc.

BROADENING RECOVERY

Business activity in Spain and Ireland also grew at its fastest pace since before the financial crisis, suggesting a broad-based recovery is taking hold in the euro zone, although Germany continued to lead the upturn.

The Composite Purchasing Managers' Index pointed to second-quarter growth of 0.5 percent, according to survey compiler Markit, which would be the strongest in three years.

It rose to 54.0 in April as expected from March's 53.1 - its 10th consecutive month above the 50 mark that divides growth from contraction.

Burgeoning new orders provided the boost, with the related sub-index rising to a 35-month high of 52.7 in April, while firms took on staff at the fastest pace since September 2011.

"Services expansion picked up markedly in Germany in April, while particularly welcome news saw Spanish activity expand for a sixth successive month and at the fastest rate since March 2007," said Howard Archer at IHS Global Insight.

"Italy achieved modest renewed services expansion in April after a dip in March, although progress remains limited. However, French services activity faltered anew and only just managed to expand for a second month running in April, which fuels concern about the underlying strength of the economy."

The PMI for the euro zone's vast service industry rose to a 34-month high of 53.1 in April from 52.2 in March thanks to a surge in new business to its highest since June 2011 and a slight rise in employment.

Services activity grew in all of France, Germany, Italy, Ireland and Spain for the first time since May 2011.

Outside the euro area, Britain's dominant services industry expanded in April at its fastest pace so far this year and companies hired aggressively, adding to signs the economy has lost none of the strong momentum seen in 2013.

(Additional reporting by Martin Santa and Jan Strupczewski in Brussels and Andy Bruce and William Schomberg in London; Editing by Catherine Evans)