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By Jonathan Cable
LONDON, Aug 5 (Reuters) - Euro zone business activity returned to modest growth in July as some curbs imposed to stop the spread of the coronavirus were lifted, but the recovery in the dominant service industry was not as sharp as expected, a survey showed.
More than 18.5 million people have been diagnosed with the coronavirus globally but, amid signs the pandemic was being contained in much of Europe, governments have allowed more businesses to reopen.
The bloc's economy contracted a record 12.1% last quarter, data showed on Friday. A Reuters poll in July predicted 8.1% growth this quarter as businesses begin to return to some sort of normal.
Wednesday's final Composite Purchasing Managers' Index (PMI) from IHS Markit, seen as a good indicator of economic health, climbed to 54.9 in July from June's 48.5, better than a 54.8 flash estimate. It had been below the 50 level separating growth from contraction for four months.
"The PMIs should be in the high sixties, just because what they should be telling us is the monthly change in economic output, but they have been very subdued," said Kallum Pickering at Berenberg.
"That said, the July data for services showed significant improvement. It is consistent with the continued easing of the lockdown across Europe."
Earlier surveys showed activity in Germany, Europe's largest economy, reached expansionary territory. In France it grew as one of Europe's strictest COVID-19 lockdowns has gradually been eased.
In Spain, where infection rates have been rising again, services improved for the second month in a row. But with some countries changing their advice on travel to the holiday hotspot, uncertainty over the recovery from the pandemic has increased.
Italy's services returned to, but the recovery remained muted.
Meanwhile, the volume of retail sales in the euro zone rebounded in June to levels recorded in February before lockdowns, official estimates showed on Wednesday, completing a recovery that began in May after record declines in March and April.
Separately, businesses in Britain expanded at the fastest rate in more than five years after restaurants, cafes and pubs reopened to diners and drinkers on July 4.
"The pick-up in the PMI in July supports other indicators suggesting that the recovery has gathered some momentum recently, though a V-shaped rebound remains highly unlikely," said Samuel Tombs at Pantheon Macroeconomics.
Overall demand increased in the euro zone and optimism improved but companies again cut headcount. The employment index held below break-even at 46.5, albeit better than June's 43.2 reading.
As people ventured out to bars and restaurants, the services PMI rose to 54.7 from 48.3, its highest since September 2018 but short of the 55.1 flash reading.
While purchasing managers were more optimistic about the year ahead, the services business expectations index was below the long-run average at 59.4, although up from June's 56.7.
(Reporting by Jonathan Cable; editing by Larry King)
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