By Jonathan Cable
LONDON (Reuters) - Euro zone business growth eased in May and firms cut prices for the 26th straight month, a survey showed on Wednesday, likely underpinning expectations for the European Central Bank to loosen policy on Thursday.
While output across the region remained solid, supported once again by Germany and pointing to euro zone GDP growth of 0.4-0.5 percent this quarter, French business activity slipped back into contraction after just two months of growth.
Similarly, accelerating growth in the service industry was offset by an easing in manufacturing.
"Although the euro zone is enjoying its best performance for three years, this is an uneven, stuttering and lacklustre recovery," said Chris Williamson, chief economist at survey compiler Markit.
Markit's Composite PMI, widely seen as a good gauge of growth, dipped to 53.5 in May, shy of a flash reading of 53.9 and below April's final 54.0. But it held above the 50 mark dividing growth from contraction for the 11th month running.
The slowdown in growth came despite firms again cutting their prices. The output price index nudged up to 48.8 from 48.7 but has held below the break-even mark since April 2012.
"The overall rate of growth is just not strong enough to allow firms to push through price hikes. This is perhaps the final nail in the coffin for hopes of a robust recovery without stimulus," Williamson said.
ECB policymakers have flagged a policy move for their meeting on Thursday and sources told Reuters last month the bank was preparing a package of policy options, including cuts in all its interest rates and targeted measures aimed at boosting lending to small- and mid-sized firms (SMEs).
Euro zone price inflation fell unexpectedly in May, coming in at just 0.5 percent, official data showed on Tuesday, increasing the risks of deflation in the currency area and all-but sealing the case for the ECB to act this week.
The index for the euro zone's vast service industry rose to a near three-year high of 53.2 in May from 53.1 in April as new business came in at its fastest pace since mid-2011, with the related subindex rising to 52.8 from 52.3.
(Editing by Hugh Lawson)