Euro zone service sector companies powered ahead in March at the fastest rate since August 2007, but signs are fast emerging that high inflation will squeeze profits, a business survey showed.

Germany and France again spearheaded the recovery of the region's services sector, although the contrast between their strong growth and weakness elsewhere - which had lessened in recent months - was strongly in evidence in March.

The Markit Eurozone Services Purchasing Managers' Index, which measures changes in the activities of euro zone companies ranging from banks to restaurants, rose to 57.2 in March from 56.8 the previous month.

That marked its 19th month in a row above the 50 mark that divides growth from contraction, with the figure revised slightly higher from a preliminary reading of 56.9 released two weeks ago.

While this headline figure underlined the durability of the recovery, survey compiler Markit said news on inflation was mixed.

The input price index surged to 60.4 in March from 58.4 in February - the highest level since the oil price boom in August 2008. But the corresponding hike in output prices charged to consumers was modest by comparison last month.

"As a result, the differential between input costs and prices charged rose to the widest since September 2008, suggesting an increased squeeze on profit margins as service providers struggled to pass higher costs on to customers," said Chris Williamson, Markit's chief economist.

Economists widely expect the European Central Bank to hike interest rates on Thursday for the first time since the global recession, acting against high inflation which ran at at an estimated 2.6 per cent year-on-year in March.

Companies are already complaining that high inflation has eaten into profits. Wary of shifting rising input prices onto consumers already struggling under austerity measures and high unemployment, many firms have instead shouldered the cost of inflation.

The composite PMI, which combines data from last Friday's manufacturing survey with the latest service sector figures, edged down to 57.6 from February's almost five-year high of 58.2, although slightly higher than the flash reading of 57.5.

Markit said the data rounded off a solid first quarter for the euro zone's private sector, consistent with GDP rising by 0.8 per cent on a quarter-on-quarter basis. Economists polled by Reuters expect growth of 0.5 percent.

"National growth divergences widened, however, as domestic demand in the periphery continued to be affected by austerity measures and political uncertainty," said Markit's Williamson.

While Germany and France prospered, the service sector in Spain resumed a trend of contraction dating back to last August, punctuated only by a single month of weak growth in February. In Ireland, service sector growth weakened in March.

The composite employment index slipped a little to 53.1 from February's post-recession high of 53.3.

Official figures published last month showed euro zone employment grew year-on-year for the first time since the financial crisis in the final months of 2010. As with the PMIs, however, the labour market in the Franco-German core outperformed while the periphery struggled.

Reuters