Despite the weak unemployment data released in the Euro Zone yesterday, reflecting the status of the vulnerable labor market, there are signs of improvement across different sectors of the economy starting from the second quarter, giving clues that contraction will slow in the second quarter of the current year after the huge contraction witnessed in the first quarter as a consequence of the global recession.

PMI manufacturing showed a slowdown in contraction for the fourth month in a row as it came in at 42.6 from both preliminary and predicted readings of 42.4. PMI composite, as a consequence, inched higher to 44.6, also better than both forecasted and previous 44.4.

The 16-nation economy released today PMI services final reading for the month of June showing improvement coming in at 44.7 compared with previous and anticipated 44.5. In May, the final reading came in at 44.8, above both prior and forecasted readings of 44.7. Thus, Services, the leading sector in the euro zone, is showing progress, albeit at very low levels, as a result of the stimulus packages announced by the ECB and the resorted confidence.

The surge in the reading was led by the largest economy in the euro area; services in Germany inched higher to 45.2 levels, better than forecast and expectations 44.3. This reflects the improvement in the German services sector. However, PMI Services inched down to 42.3 levels from the previous 43.1 and market expectations 42.9.

However, readings are still below 50, indicating that sectors are still contracting and there is a need for continuing intervention from the ECB and national governments to boost the economy and support it with liquidity. The sector is still suffering especially the financial services that are negatively affected by illiquidity and low interest rates which dampened lending and made the financial institutions thirst to capital to reinforce their negative balance sheets.

Moreover, the euro area released its retail sales for May coming in at -0.4% compared with the prior 0.2% which was revised to -0.1% and the estimated reading of -0.1%, whereas the annual reading came in at -3.3% from the previous -2.3%, revised down to -2.5%, and median expectations of -2.7%. Retail sales are still impacted by the high unemployment rates as employers shed employees and cut income and bonuses and therefore decreasing the purchasing power of individuals.

The ECB expects the economy to show improvement in the coming period but this doesn't mean that the economy will return fast to growth. They expect growth to be witnessed again by mid 2010 and the economy won't come back to its original status before 2011. The efforts done by the ECB to stop the ongoing deterioration in the economy seem to be effective.

Trichet and his team lowered the borrowing cost to a record low of 1% and they mentioned they are ready to slash it further if needed, and they introduced a 60 billion euros plan to revive the economy and halt the decelerating prices. The bank will start purchasing 3-10 years maturity bonds on July 6, which are supported by euro. Trichet reckons supporting markets with liquidity and providing financial institutions with are the optimal method to bring back the economy to growth.

Moving to the U.K., PMI services showed expansion for the second month coming in at 51.6 levels, better than market expectations of 51.5, yet below the previous 51.7. However, it is the only sector that managed to breach the 50 level which means showing expansion once again. The services sector advance is very important step toward recovery since it represents 75% of the British economy.

Also, the plans unveiled by the BoE gave the economy a boost starting from the April after the worst contraction in five decades posted in the first quarter. The BoE lowered the interest rate more than the ECB to 0.5% and embarked upon methods of quantitative easing faster than the ECB as they started earlier in March.