(Bloomberg) -- Euro-area private-sector activity advanced to the highest level in almost a year, driven by a buoyant services sector and Germany’s return to growth.

Data Tuesday showed S&P Global’s purchasing managers’ index increased to 51.4 in April, stronger than the 50.7 predicted by economists and above the 50 level that indicates expansion for a second month. Germany was above that key mark for the first time since June, defying analysts who had expected another sub-par reading.

The positive figures suggest that the euro area will probably expand by 0.3% in the second quarter, matching the rate of growth in the January-March period, said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank

That’s a more upbeat prediction than the Bloomberg consensus, which sees just 0.1% growth at the start of the year, with data due on April 30.

German private-sector activity grew for the first time in 10 months, driven by services. Manufacturing continued to shrink, though at a slower pace than the month before.

“It appears that the recession was predominantly concentrated within the manufacturing sector, while the broader economy may have narrowly skirted such a downturn,” de la Rubia said. “The service sector may serve as a catalyst for the overall economy.”

After contracting in the final quarter of last year, Germany was long expected to have had a shallow recession over the winter. But the Bundesbank last week said output may have grown slightly in the first three months of the year because of a pickup in industrial production, exports and construction — meaning the country would avoid such a scenario.

De la Rubia agreed, saying a Nowcast model points to economic expansion of 0.1% in the first quarter followed by 0.2% in the second.

German bonds fell across the curve and money markets reduced wagers on the scope for interest-rate cuts after data for the country were published. The two-year maturity, which is sensitive to changes in monetary policy, rose as much as three basis points to 2.99%.

The overall performance was also better in France, where activity remained broadly stable after contracting for 10 months. That development was also driven by services, where rising demand resulted in the first expansion in almost a year.

New orders placed with factories fell at the steepest pace since January, increasing the wedge between manufacturers and services firms.

“The French services sector is the workhorse of the economy,” said Norman Liebke, an economist at Hamburg Commercial Bank. “French manufacturing output stays subdued, but we expect it will soon follow the path of the services sector. The manufacturing sector delays the overall economy’s recovery for now, though.”

The better momentum in both countries was flanked by stronger price pressures, a potential source of concern for European Central Bank officials who are gearing up for a first interest-rate cut in June. That development was also centered on the services sector, where rising wages are playing a bigger role.

Diverging fortunes were equally visible in the labor market. While German and French services firms added workers at a quicker pace, factories shed jobs.

Overall though, the currency bloc’s top two economies couldn’t keep pace with the rest of the region, which appears to be recovering after the energy crisis that stifled its post-Covid rebound.

The rise in power costs — triggered by Russia’s war in Ukraine — also fanned inflation, though consumer-price growth has since slowed markedly. The purchasing-manager data showed that price pressures “intensified slightly” this month.

“The PMI figures are poised to test the ECB’s willingness to cut interest rates in June,” de la Rubia said. “Accelerated increases in input costs, likely driven not only by higher oil prices but also, more concerningly, by higher wages, are a cause for scrutiny. Concurrently, service-sector companies have raised their prices at a faster rate than in March, fueling expectations that services inflation will persist.”

Still, he doesn’t expect that to derail a well-telegraphed easing at the ECB’s next monetary-policy meeting. “However, we doubt that the central bank will adopt a ‘pragmatic speed,’ as suggested by Francois Villeroy de Galhau” de la Rubia said. “Instead, we expect a more cautious approach.”

What Bloomberg Economics Says...

“The euro-area composite PMI suggests the recovery of the monetary union’s economy is gathering momentum, while high inflation persists. That should strengthen the case of the hawks at the European Central Bank who would like to pause in July after a first interest-rate reduction in June.”

—David Powell, economist. Click here for full REACT

Comments by ECB Vice President Luis de Guindos earlier on Tuesday reinforce that approach.

“The level of uncertainty makes it very difficult to say,” he told Le Monde, according to a transcript on the ECB website. “I already mentioned June. As for what happens afterwards, I’m inclined to be very cautious.”

UK Recovery

Separate data for the UK showed the economy’s recovery from recession unexpectedly gathered pace at the start of the second quarter as private-sector firms reported the strongest growth in almost a year.

PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.

US figures later are set to show continued growth. Earlier numbers from Australia, India and Japan pointed to faster expansion.

--With assistance from Joel Rinneby, Mark Evans, James Hirai and Tom Rees.

(Updates with Bloomberg Economics comment after 18th paragraph, UK PMI data in 21st paragraph.)

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