Euro zone business activity grew at its fastest pace in seven months in March, supported by an easing in the long-running manufacturing downturn despite slower growth in services, a survey showed.

The improving business climate in the common currency bloc could gain more traction over the coming months as plans for a spending splurge in infrastructure and defense, particularly in Germany, raise optimism for a turnaround in Europe's economic fortunes.

HCOB's preliminary composite euro zone Purchasing Managers' Index, compiled by S&P Global, rose to 50.4 this month from February's 50.2, its highest since August. It has remained above the 50 mark separating growth from contraction since the start of this year.

Growth in activity was still meagre, however, and the index was below a prediction in a Reuters poll for a rise to 50.8.

An index measuring the bloc's dominant services industry declined to 50.4 from last month's 50.6, below the Reuters poll forecast of 51.0.

But a near three-year-long contraction in manufacturing eased and its headline PMI increased to an over two-year high of 48.7 from 47.6 in February. The Reuters poll had predicted it at 48.2.

An index measuring factory output that feeds into the composite PMI showed expansion for the first time in two years. It jumped to 50.7 from 48.9, its highest since May 2022.

"Just in time with the beginning of spring we may see the first green shoots in manufacturing," said Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.

"While we should not be carried away by a single data point, it is noteworthy that manufacturers expanded their output for the first time since March 2023."

Faced with higher costs, manufacturing firms raised prices charged. Both input and output inflation hit their highest in seven months. However, prices grew at a slower pace in the services sector.

In a sign of improving sentiment among businesses, employment generation gathered pace this month. The composite employment index rose to 50.1 from 49.2, above breakeven for the first time in eight months.