Euro zone business growth solid in May but shows signs of easing -flash PMI

LONDON (Reuters) – Euro zone business growth remained resilient but slowed slightly more than thought this month as the bloc’s dominant services industry lost a little of its shine and the downturn in the manufacturing sector deepened, a survey showed on Tuesday.

HCOB’s flash Composite Purchasing Managers’ Index (PMI) for the bloc, compiled by S&P Global (NYSE:) and seen as a good gauge of overall economic health, fell to 53.3 in May from April’s 54.1.

While still comfortably above the 50 mark separating growth from contraction it was below a Reuters poll estimate for 53.5.

“Euro zone GDP is likely to have grown in the second quarter thanks to the healthy state of the services sector. However, the manufacturing sector is a powerful drag on the momentum of the economy as a whole,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

With prices still rising sharply and indebted households having to pay increased borrowing costs, overall demand growth waned sharply. The new business index dropped to 50.4 from 52.5.

A PMI for the services industry dipped from April’s one-year high of 56.2 to 55.9, beating the Reuters poll prediction for a steeper fall to 55.6.

Despite a slowing of new business growth, services firms increased headcount at a strong pace – the employment index was at 55.0, albeit lower than April’s 11-month high of 55.6.

Meanwhile demand for manufactured goods sank and the factory PMI fell to 44.6 from 45.8, its lowest since May 2020 when the coronavirus pandemic was cementing its grip on the world. The Reuters poll had predicted a reading of 46.0.

An index measuring output, which feeds into the composite PMI, fell to a six-month low of 46.3 from 48.5.

But largely healed supply chains and lower energy prices meant input costs for factories fell at the fastest pace in over seven years, allowing factories to cut their prices for the first time since September 2020. The output prices index sank to 49.0 from 51.6.

That may be welcome news to policymakers at the European Central Bank, who despite embarking on their most aggressive tightening path ever have so far failed to get inflation back to the 2.0% target.

However, prices charged by services firms rose faster and the ECB is expected to add another 25 basis points to the deposit rate next month and in July, despite many of its peers having already paused rate hikes or doing so soon, a Reuters poll found.

“The ECB will have a headache with the PMI price data. This is because selling prices in the services sector actually rose more than in the previous month. It is precisely price developments in this sector that the ECB is watching with a wary eye,” de la Rubia added.

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