The euro zone’s economic contraction slowed more than expected in July, but an acceleration in the decline of French output suggested the currency area’s recovery from the deepest recession since World War II is likely to be gradual.

The flash reading of the euro zone’s composite output index, a closely watched gauge of private-sector activity, rose to a 10-month high of 46.8 in
July from 44.6 in June, Markit Economics said Friday.

That topped the market consensus estimate of a rise to 45.3 from a Dow Jones Newswires survey of economists last week, but the reading below the neutral 50.0 level indicates output is still contracting.

“In all, the further pick-up in the composite PMI in July is certainly welcome news, but we continue to believe that a sustained return to positive growth in the euro zone is unlikely to occur until next year,” Martin van Vliet, an economist at ING, said in a note.

Chris Williamson, chief economist at Markit, said the figures suggested the
quarterly decline in euro-zone gross domestic product had eased to about 0.3% in July from 0.5% to 0.6% in the second quarter.

But although that was a further step on the road to recovery, he said the
data suggested the European single currency area was lagging the U.S. and U.K., where returns to growth were already evident.

“It is also a concern that the speed of the downturn in the euro area has
only been arrested by the use of widespread discounting, as firms forsake
profits to drive sales,” he said.

Markit figures showed that although Germany’s composite output index jumped to an 11-month high of 48.9 in July with support from a recovery in
manufacturing, the French composite index was dragged down to a two-month low of 47.2 by a sharper drop in services activity.

“The fact that the French services PMI fell back on the month…suggests that
there may be more persistent weakness than the headline euro area figures are indicating,” said Daiwa Securities SMBC economist Colin Ellis. “Today’s figures are welcome – but, fundamentally, still indicate that the euro area is firmly in recession.”

Euro-zone GDP plunged a record 2.5% in the first quarter as the global credit
crisis throttled business activity and exports were hit by severe downturns in
the currency area’s main trading partners.