July 5 (Bloomberg) -- Service industries in the 12 countries using the euro, ranging from tourism to banking to software, grew at a slower pace in June than in the previous month as an export- led recovery failed to boost hiring and consumer spending.

An index based on a survey of 2,000 purchasing managers compiled for Reuters Group Plc by NTC Research Ltd. fell to 55.3 from 55.8 in May. Economists had expected a decline to 55.5, the median of 32 forecasts in a Bloomberg News survey showed.

An unemployment rate of 9 percent, the highest in almost five years, is deterring consumer spending. As a result, companies such as SAP AG, the world's largest maker of business-management software, are reliant on rising demand outside their home markets.

``There hasn't really been a recovery in employment at the euro-zone level,'' said Christel Rendu de Lint, who helps manage the equivalent of $7 billion in euro region fixed income at Pictet & Cie in Geneva. ``If the labor market fails to improve, it will continue to be a drag on the economy.''

The region's manufacturing industry also expanded at a more muted pace in June than in May, a similar survey compiled by NTC for Reuters showed last week. Both services and manufacturing are still expanding, with both registering readings above 50.

Business expectations fell the most in today's report, with the sub-index dropping to 64.7 from May's 66.1. An index measuring employment slipped below 50 to 49.9 to indicate a contraction.

Lagging U.S.

``Companies are under pressure to reduce costs and this affects how they hire people,'' said Steve Webster, an economist at 4Cast Ltd in London. ``It suggests a slow, but unspectacular, recovery as far as private consumption is concerned.''

Lagging consumer demand means that growth in the euro region is behind that of the U.S. The service industries in the world's largest economy probably expanded in June with a reading of 63.0, according to the median of 51 forecasts in a Bloomberg survey before a report from the Institute for Supply Management tomorrow.

The decline in the euro-region services index was led by Germany and France, the two biggest economies in the area. The services reading for Germany dropped to 52.3 from 53.6 and in France the index fell to 57.9 from 58.5. In Italy and Spain, the region's third- and fourth-largest economies, the readings rose.

Stocks were little changed, with the Dow Jones Stoxx 50 index gaining 0.4 percent from Friday's close to 2670.85 at 11.22 a.m. in Frankfurt. The euro was also little changed from Friday, at $1.2292.

German Unemployment

Companies dependent on business in Germany such as HVB Group, Germany's second-largest bank, and Pfleiderer AG, a maker of materials for the building, railway and furniture industries, are cutting jobs to boost profitability. German unemployment probably increased a seasonally adjusted 10,000 in June from May, according to the median forecast of a Bloomberg News survey of 36 economists. That report will be published tomorrow.

The German economy accounts for almost a third of euro-area gross domestic product. While consumer spending boosted growth in France and Italy, Germany has depended almost entirely on sales abroad. German retail sales fell 1.7 percent in May from April.

That's partly explained by an unemployment rate of 9.8 percent, the second-highest in the dozen euro nations and almost twice the U.S. rate of 5.6 percent. German business confidence fell to a nine-month low in June.

French, Spanish Optimism

By contrast, French manufacturers' confidence climbed last month, matching April's three-year high, as executives said in a survey they expect to lift production amid rising exports. Across the Pyrenees mountains, in Spain, where the government expects an 11th consecutive year of economic growth based on consumer spending and construction, businessmen are also more confident.

``In the service sector, our industrial division is growing well in terms of sales and profit,'' said Jesus Catania, chairman of Mondragon Corporacion Cooperative, a group of companies including banks, industrial services, supermarkets and manufacturers that employs more than 50,000 people in Spain. ``We are very optimistic on the outlook for this year.''

European Union Monetary Affairs Commissioner Joaquin Almunia said on Friday he may raise his forecast for growth in dozen nations sharing the euro this year, after the economy grew faster than expected in the first quarter. In April, the commission predicted growth of 1.7 percent after last year's 0.4 percent.

SAP said last week it won a $4 million order from Hungary's state railway company, MAV. Rising sales of industrial goods also increase demand for maintenance, financial, transport and other services. Airbus SAS, the world's biggest commercial-aircraft maker, last month won a $2 billion order for 20 A330-200 planes from China Eastern Airlines Corp.

Interest Rates

The Bank for International Settlements, which serves the world's central banks, last Monday said policy makers will have to start raising borrowing costs as growth accelerates. The U.S. Federal Reserve raised the target for the overnight lending rate by a quarter point last week, to 1.25 percent.

``World trade will grow between 9 percent and 9.5 percent this year,'' said Wolfgang Wiegard, chairman of Chancellor Gerhard Schroeder's council of economic advisers. Still, ``domestic demand is weak and that won't change significantly this year.''

The European Central Bank left its benchmark interest rate at 2 percent at a meeting on Thursday as economic growth in the euro region lags the U.S. and much of Asia. The recovery is ``advancing gradually,'' ECB council member Jaime Caruana said last week.

The Organization for Economic Cooperation and Development in Paris is forecasting growth of 1.6 percent for the euro region this year, after a decade low of 0.4 percent in 2003. The U.S. is predicted to expand 4.7 percent. The euro region grew 0.6 percent in the first quarter, trailing the 1 percent expansion in the U.S. and 1.5 percent in Japan.

To contact the reporters on this story: Jeffrey T. Lewis in Madrid at jtlewis@bloomberg.net

Last Updated: July 5, 2004 05:28 EDT