Euro zone businesses logged their busiest quarter in three years at the start of 2014 but did so by slashing prices, surveys showed today, underscoring fears that deflation may soon afflict the region.

Today's figures show that while the recovery from the euro zone's deepest economic downturn has been led by Germany, it is becoming more broad-based.

Survey compiler Markit said the Composite Purchasing Managers' Index pointed to first-quarter growth of 0.5%.

If realised, that would beat expectations in a Reuters poll last month for more modest growth of 0.3% and mark the fastest pace of growth since early 2011.

Markit's Composite PMI, which is widely regarded as a good gauge of growth, dipped to 53.1 in March from February's 32-month high of 53.3, holding above the 50 mark that divides growth from contraction for the ninth month.

But that buoyancy has come with lower prices. Even as input costs rose, firms cut charges for the goods and services they sold at a faster rate than in February. 

The output price sub-index fell to a four-month low of 48.8 from 49.3.

"The final PMI data for March round off the region's best quarter for three years," said Chris Williamson, chief economist at Markit.
"But the concerns will lie with the price data. The weakening price indices will stoke fears that deflationary forces are intensifying amid weak demand and near-record unemployment."

Euro zone inflation fell to just 0.5% last month, its lowest since November 2009 and well below the ECB's 2% target ceiling.

Today's figures show that the euro zone's dominant service industry fell to 52.2 from February's 32-month high of 52.6.

Still, service firms were the most optimistic about the year ahead since the middle of 2011. The business expectations index jumped to 64.0 from 62.4.