BERLIN, (Reuters) - German business activity expanded in July as the services sector grew at the fastest rate in three years, a survey showed on Thursday, suggesting Europe's largest economy may be regaining momentum in the third quarter. Markit's preliminary composite Purchasing Managers' Index (PMI) of activity in the manufacturing and services sectors that make up more than two-thirds of the economy came in at a three-month high of 55.9, up from 54.0 in June.
That was far above the 50 mark that separates expansions in activity from contractions and marked the 15th straight month of
growth.
Markit chief economist Chris Williamson said the reading suggested the economy could expand by up to 0.8 percent in the July-September quarter.
The economy grew by 0.8 percent in the first quarter - its strongest rate in three years - but is expected to slow in the second before reviving in the third. Recent data has been soft, with industrial output, orders, exports and imports all falling.
"The overall health of the economy is much better than official data will portray, but there's definitely challenges ahead and the upturn is fragile in the face of the geographical political concerns at the moment," Williamson said.
Manufacturing firms fared better than forecast as output increased more steeply while orders flowed in faster from abroad and within the country than in June, resulting in some, albeit minimal, hiring of new staff. Their margins also got a boost as input costs fell while factory-gate prices rose.
Manufacturers ramped up their purchases, suggesting they expect output to rise in the coming months. Activity in the service sector grew at the fastest rate since June 2011, but new business and the rate of hiring slowed.
Business expectations were also a tick weaker than in June, which Williamson said showed there was "not particularly a jubilant mood in the service economy at the moment".
Service providers' margins were squeezed as input costs rose more strongly than output prices.
(Reporting by Michelle Martin; Editing by Hugh Lawson)