Spain's service sector growth slows to 18-month low in May, PMI shows

Spain's service sector expansion slowed to an 18-month low in May, with the HCOB Spain Services PMI falling to 51.3 from 53.4, reflecting concerns about tariffs and international uncertainty impacting new business and exports; despite the slowdown, firms continued hiring, albeit at a reduced pace, while input cost inflation eased slightly, and overall confidence weakened to its lowest level since November 2023.

Analysis

Spain's service sector experienced a notable deceleration in May, with the HCOB Spain Services PMI Business Activity Index falling to 51.3 from 53.4 in April, marking its slowest expansion pace in 18 months and the weakest activity growth since November 2023. This slowdown is primarily attributed to constrained demand conditions, particularly a marginal rise in new business—the slowest in its 18-month growth trend—and a decline in new export business for the first time since November 2023, largely due to tariff-related uncertainties among international clients. Despite this cooling, firms continued to hire, albeit at the weakest rate since February 2024, which contributed to a modest reduction in work backlogs for the first time since December 2023. Input cost inflation, driven by wages and supplier charges, remained elevated but eased to its lowest rate since last November. Consequently, business confidence within the sector weakened significantly, reaching its lowest point since November 2023, reflecting concerns about the challenging economic environment and global uncertainties. This services sector softening contrasts with a sister survey indicating a rebound and expansion in the manufacturing sector for the first time since January, and government expectations for robust overall economic expansion of 2.6% this year, outpacing neighboring European economies.

Key Decisions for Investors

• Investors should closely monitor the impact of international trade uncertainties and potential tariffs on Spanish service sector companies, particularly those with significant export exposure, given the reported decline in new export business.
• Consider the divergence between Spain's slowing services sector and its resilient manufacturing sector, alongside strong government growth forecasts, when assessing overall country exposure; the services slowdown may present headwinds for specific sub-sectors despite broader economic optimism.
• Track upcoming service sector PMI readings, employment trends, and business confidence indicators in Spain to gauge if the May slowdown is a temporary blip or the beginning of a more sustained period of weaker growth, which could influence investment allocations within the Spanish market.