Euro zone August business growth slowest since start of 2015

September 5, 2016 6:55 AM EDT

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By Jonathan Cable

LONDON (Reuters) - Euro zone business growth in August was at its weakest since the start of last year, suggesting the bloc's struggling economy is losing what little momentum it had, a private sector survey showed on Monday.

Adding to policymakers' concerns, the slowing came as firms offered deeper discounts despite rising input costs and against the background of ultra-loose monetary policy and the promise of more loosening to come later this year.

In a sign Europe's biggest economy may also be losing steam, German services industry growth slowed more than expected, its weakest showing for more than three years. However, French, Italian and Spanish growth accelerated.

"The economy is trundling along but it is not really going very far or very fast. It has clearly lost momentum over the course of this year," Commerzbank economist Peter Dixon said.

"The ECB's policies don't seem to be stimulating the kind of activity that is desired and it might prompt them to do more but ultimately it shows the limits of monetary policy."

According to a Reuters poll, economists say that while the European Central Bank will keep policy unchanged on Thursday it will respond to pressure for further easing and announce an extension to its asset purchase programme this year.

Markit's final composite Purchasing Managers' Index for the euro zone was 52.9 in August, below a flash estimate of 53.3 and July's 53.2, its lowest since January 2015 but it has been above the 50 mark that divides growth from contraction since mid-2013.

August's PMI points to steady but sluggish 0.3 percent growth in the third quarter, Markit said, which if realized, would match the median prediction in a Reuters poll.

In brighter news, euro zone retail sales rose more than expected in July, posting the largest monthly increase of the year and investor sentiment in the bloc improved further in September, another survey showed on Monday.

"This is all the more welcome given the purchasing managers disappointingly reporting that overall euro zone services and manufacturing output slipped back to a 19-month low in August," IHS Global Insight economist Howard Archer said.

Years of ultra loose monetary policy has so far failed to get inflation anywhere close to the ECB's 2 percent target ceiling - it was just 0.2 percent in August - and the composite output price fell to 49.3 last month, below July's 49.8.

Despite the discounting, growth in the bloc's dominant service industry also waned. Its PMI was 52.8, matching June's 17-month low and below July's 52.9 and flash estimate of 53.1.

With the outlook somewhat bleak, optimism among service firms was at its gloomiest since late 2014. The business expectations index registered 60.7, down from 60.9 in July.

Britain - which is outside the currency bloc - voted in late June to leave the European Union although its services industry bounced back strongly last month after apparently reeling from the shock in July.

Economists said that the Brexit vote seemed to have left European businesses unscathed, for now.

"While the euro zone economy seems to have avoided an immediate shock from the UK's Brexit vote, there is still pressure on the ECB to take action at its meeting this week," Capital Economics economist Stephen Brown said.

(Editing by Louise Ireland)

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