Euro zone business growth stalls in May as services stumble, PMI shows

Euro zone business activity edged up slightly in May, with the composite Purchasing Managers’ Index at 50.2, according to HCOB/S&P Global; this figure, while above the expansion threshold, marks the weakest reading since February due to a contraction in the services sector (49.7) for the first time in six months, offsetting moderate growth in manufacturing. New business has declined since June 2023, and foreign orders continue to fall, while price pressures have eased, potentially influencing the European Central Bank's monetary policy decisions as they prepare to cut interest rates.

Analysis

Euro zone business activity exhibited minimal expansion in May, with the HCOB Composite Purchasing Managers’ Index (PMI) compiled by S&P Global falling to 50.2 from April's 50.4. While this reading surpasses the preliminary estimate of 49.5 and marks the fifth consecutive month above the 50.0 expansion threshold, it represents the weakest growth since February. This slowdown is primarily attributed to the services industry, which contracted for the first time since November, its activity index dropping to 49.7 from 50.1. In contrast, manufacturing output maintained the same moderate growth as the previous month. A significant concern is the persistent decline in demand; overall new business has fallen since June 2024, with the index dipping to 49.0 in May, and foreign orders have provided no support, continuing a downward trend for over three years. Geographically, performance varied: Italy recorded its fastest growth in over a year, while Spain's growth slowed, France neared stabilization, and Germany re-entered contraction. Employment saw a fractional increase driven by services, while manufacturers reduced jobs. Price pressures eased, with composite input costs rising at their slowest pace in six months and selling price inflation at its weakest since October, though services sector sales price increases remain a point of attention for the European Central Bank. Despite an improvement, business confidence remains historically subdued, reflecting caution about future prospects even with an anticipated ECB interest rate cut. The overall sentiment from this data is moderately negative and warrants a cautious outlook.

Key Decisions for Investors

• Investors should exercise caution regarding Eurozone equities sensitive to domestic demand, given the near-stagnant overall PMI and the concerning contraction in the services sector.
• Monitor upcoming European Central Bank communications closely, as an expected interest rate cut could provide a temporary lift, but the underlying economic weakness shown by falling new orders and declining services activity may limit its impact.
• Consider a geographically selective approach within the Eurozone, noting the divergence where southern nations like Italy show resilience while core economies such as Germany experience contraction.
• Pay close attention to forthcoming inflation figures, particularly from the services sector, as persistent price pressures could constrain the ECB's scope for further monetary easing despite the current sluggish growth.