By Jonathan Cable
LONDON (Reuters) - Euro zone businesses performed much better than anyone expected this month but did so by slashing prices again, and optimism about the future fell to its lowest level in over a year, surveys showed on Thursday.
The growth data will provide some relief for the European Central Bank but news that firms cut prices for the 31st month, at the steepest rate in almost five years, will stoke fears of deflation in the region.
Markit's Composite Flash Purchasing Managers' Index, based on surveys of thousands of companies across the region and seen as a good indicator of growth, rose to 52.2, above all forecasts in a Reuters poll.
The poll had predicted a fall to 51.7 from September's headline reading of 52.0 and October marks the 16th month the index has been above the 50 level that separates growth from contraction.
"The overall headline number has risen but there are signs that it is going to start deteriorating again. Most worrying is the decline in new orders," said Chris Williamson, chief economist at data collator Markit.
"And this is the most aggressive we have seen price cutting since the height of the financial crisis and it's moving in the wrong direction. It's going to raise worries about deflation."
Inflation slipped to its lowest for five years in September, official data showed last week, and the latest PMIs will do little to allay fears that deflation - which hit five peripheral euro zone countries last month - will spread.
The composite output price index slumped to 47.1 from 48.5, its lowest reading since February 2010.
Markit said the PMIs point to a 0.2 percent expansion of GDP in the current quarter, with risks to the downside. A Reuters poll last week also predicted 0.2 percent growth.
GERMAN REBOUND
Earlier data from Germany showed activity increased in both the manufacturing and services industries, boosted by resurgent growth among factories that was far better than anyone expected in a Reuters poll. The services PMI was weaker than predicted.
Germany's economy, Europe's largest, contracted for the first time in over a year in the second quarter while France's, the bloc's second biggest, flatlined as it did in the first three months of the year.
The latest flash PMI from France showed services activity shrank for a second month - and slightly more than expected - while the manufacturing industry contracted far more than even the most pessimistic economist polled by Reuters had predicted.
Still, services firms across the euro zone, which dominate the bloc's economy, increased activity at the same pace as in September. The services PMI was unchanged at 52.4, better than the Reuters poll forecast for a fall to 52.0.
Despite that upturn firms were less optimistic about the year ahead. The business expectations index fell to 56.2 from 59.3, its lowest reading since June last year.
Manufacturing firms also performed better than expected. The sector's PMI was 50.7 versus a forecast for a fall to 49.9 from September's 50.3.
An index measuring output, which feeds into the composite PMI, jumped to 51.9 from 51.0. But November may not be as strong as new orders fell for a second month with the related sub-index unchanged at 49.3.
"New orders are a good indicator of demand so this is a pretty downbeat picture," Williamson said.
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(Editing by Hugh Lawson)