Euro zone services sector contraction eased in June as inflation cooled sharply, PMI shows

LONDON, July 3 (Reuters) - The euro zone services industry contracted at a slower pace in June as cost pressures fell at the sharpest rate on record outside of pandemic-era lockdowns, helping to stabilise the broader economy after two months of decline, a survey showed.

Oil prices dropped for a third consecutive day on Thursday as concerns over supply disruptions eased after Qatar said Iran and the U.S. had made progress in talks over the Strait of Hormuz.

S&P Global's Eurozone Services PMI Business Activity Index jumped to 49.4 in June from 47.7 in May. While marking three months of contraction it was above a preliminary estimate for 48.9.

Readings below 50.0 signal a decline in activity.

"An easing of the downturn in euro zone service sector business activity during June is welcome news and, in conjunction with manufacturing growth, means the wider economy has stabilised after two months of falling output," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Manufacturing output ended its best quarter since early 2022 last month with easing cost pressures as the U.S. and Iran negotiated a ceasefire giving relief to factories, a sister survey showed on Wednesday.

Demand for services fell again in June. Foreign orders also declined for another month though the pace of reduction slowed compared with May.

Despite the drop in new business, services companies added jobs at the fastest pace since January, reversing a small reduction seen in May. Sentiment among services firms also improved, reaching its highest level since February.

"A key drag on economic growth since the outbreak of the war in the Middle East has been the subduing of demand from consumers due to the energy price spike, but these inflationary pressures have shown signs of cooling markedly in June," Williamson added.

Input cost inflation in the services sector eased in June for the first time since October, dropping to a four-month low. The rate of decline was the steepest since records began in 1998, barring only the COVID-19 lockdowns of early 2020. Prices charged to customers rose by a smaller margin.

Inflation in the common currency area was less than expected last month, coming in at 2.8%, but still well above the European Central Bank's 2.0% target, official data showed on Wednesday.

The near-unprecedented cooling of cost pressures could reduce pressure on European Central Bank policymakers to raise interest rates further, as they wait for greater clarity on how quickly price pressures are fading.

Last month the ECB raised interest rates for the first time in nearly three years.

A broader S&P Global Eurozone Composite PMI Output Index, which combines services and manufacturing, climbed to 50.0 in June from May's 48.5, moving out of contraction territory for the first time since March as growth in factory activity offset the continued, if slower, decline in services.

(Reporting by Jonathan Cable; Editing by Toby Chopra)