ROME (Reuters) - Italy’s economy may be set for a modest recovery in the next few months, two surveys suggested on Monday, giving the government some breathing space as it prepares a challenging 2020 budget in the autumn.

The euro zone’s third-largest economy has been broadly stagnant for the last five quarters, and gross domestic product was flat in the second quarter on both a quarter-on-quarter and a year-on-year basis, data showed last week.

Things may be about to improve, however, national statistics bureau ISTAT said on Monday, citing its leading indicator for July, while a separate survey of service sector activity showed a significant improvement in the same month.

Confidence improved last month among both firms and consumers, who are more upbeat about prospects for the economy and jobs, ISTAT said in its monthly economic bulletin.

Its composite leading indicator “has interrupted the downward trend (that was) in place since the end of last year, pointing to a scenario of a slight improvement in production levels,” the statistics bureau said.

Italy’s labour market has been picking up for several months, despite the stagnant economy.

The jobless rate fell to 9.7% in June, below expectations and the lowest reading since January 2012, while the employment rate increased to the highest on record, ISTAT said last week.

Italy’s services sector grew for a second month running in July and by more than expected, IHS Markit’s closely watched survey of purchasing managers showed on Monday.

The group’s Business Activity Index for services rose to 51.7 in July from 50.5 in June, climbing further above the 50 threshold that separates growth from contraction and posting its highest reading since March.

A Reuters survey of eight analysts had forecast a reading of 50.6.

The government of the anti-establishment 5-Star Movement and the right-wing League has promised sweeping tax cuts next year, a pledge that will be difficult to square with its commitment to the European Commission to keep a lid on the budget deficit.

While there have been signs of improvement in services and employment, the manufacturing sector continues to struggle.

IHS Markit’s sister survey for manufacturing, published last week, showed activity contracting for a tenth month running in July, and at roughly the same rate as in June.

The government’s most recent official forecast sees full-year 2019 GDP growth of just 0.2%, leaving Italy in its customary position among the euro zone’s most sluggish economies.