TOPWRAP 4-More evidence worst is past for world economy

Published: 03 Jun 2009 17:07:34 PST

* Euro zone service sector contracted at slower pace in May

* UK service sector returned to growth in May

* German car sales up 40 percent year-on-year in May -source

* Australia dodges recession as Q1 GDP rises

* BoJ's Kamezaki warns of downside risks to economy

LONDON, June 3 - The euro zone's dominant service sector shrank at a slower pace in May while Australia reported first-quarter growth on Wednesday, strengthening the view that the worst of the global recession is over.

Britain's service sector also improved, returning to growth in May and delivering its most optimistic outlook since October 2007, while new car sales in Germany were said to have risen 40 percent in May.

But two reports -- revised data showing a record fall in first-quarter euro zone GDP, and producer prices for April -- gave timely reminders that European economies are still very much at a low point.

The dollar, which had been near a recent 2009 low on growing investor appetite for risk, received a fillip from a report that leading Asian countries see no alternative to the U.S. unit as the world's main reserve currency.

But Bank of Japan policy board member Hidetoshi Kamezaki warned of downside risks to the economy and said long-term bond yields should reflect the outlook. "It's desirable for long-term interest rates to move in a way that is consistent with the economic and price outlook," he said.

The U.S. Federal Reserve has committed to buy $300 billion in government bonds as part of its efforts to keep long-term interest rates low, and will purchase some on Wednesday.

Fed Chairman Ben Bernanke may give more detail on the Fed's Treasury-buying plans in testimony to Congress later in the day, while employment and factory orders data will give further clues to the state of the U.S. economy.

U.S. mortgage applications fell last week, reflecting a drop in demand for home refinancing loans as interest rates surged to their highest levels since late January.

MAY BETTER IN EUROPE

Markit revised its Eurozone Services Purchasing Managers Index to a seven-month high of 44.8 for May from the first estimate of 44.7, above April's 43.8 and forecasts of 44.7.

It said business expectations rose to a 15-month high on hopes the worst of the recession was over, and, if the current trend continued, the service sector would return to growth by August.

"The most important point is that the upward momentum is being maintained. The expectations component increased very sharply in May suggesting that the run of increases will probably continue in the coming months," said BNP Paribas economist Ken Wattret.

A survey from leading British mortgage lender Nationwide Building Society showed consumer confidence at a six-month high.

German new car registrations in May, helped by cash incentives for buyers to junk old cars, rose 40 percent year-on-year in Europe's biggest market to around 390,000 units, sources familiar with the data told Reuters.

The German car sales news was in stark contrast with the 34 percent fall in U.S. sales in May reported on Tuesday.

But the U.S. figure was better than most analysts had expected after aggressive discounting, and Al Castignetti, general manager of Nissan in the United States, said it was "definitely a step in the right direction".

Eurostat said January-March output in the euro zone shrank a record 2.5 percent quarter-on-quarter, in line with an earlier reading issued on May 15, the result of plunging corporate investment and exports.

It revised the annual fall to 4.8 percent from 4.6 percent.

Eurostat also said factory gate prices logged their biggest annual fall on record in April, the 4.6 percent figure pointing to negative inflation in coming months and more monetary easing from the European Central Bank.

AUSTRALIA AVOIDS RECESSION

Australia's economy grew a stronger-than-expected 0.4 percent in the first quarter as the best trade performance in almost half a century helped offset a slump in business and housing investment.

Australia has fared better than most countries during the financial crisis and its aftermath, thanks to quick and deep interest rate cuts, hefty stimulus spending and a solid contribution from commodity-based exports.

Indonesia's central bank cut interest rates by 25 basis points, as expected. Some analysts believe this could mark the end of the easing cycle in Southeast Asia's largest economy as rising commodity prices increase inflationary pressures.

STOCKS WEAKEN

European stocks were weaker at 1130 GMT, with the FTSEurofirst 300 down 1.1 percent as bank sector stocks added to Tuesday's losses and commodity shares slipped after oil prices stalled following recent strong gains.

U.S. stock futures pointed to a weaker opening.

Japan's Nikkei average closed up 0.4 percent at a fresh eight-month high, while stocks elsewhere in the Asia-Pacific gained 0.9 percent.