Euro zone business growth slows but still resilient

Euro zone business growth slowed this month but stayed strong as the cost of living crisis put a dent in consumer spending power while a shortage of raw materials held back expansion in manufacturing.

S&P Global’s flash Composite Purchasing Managers’ Index, seen as a good guide to overall economic health, fell to 54.9 in May from 55.8 in April, lower than the 55.3 predicted in a Reuters poll.

Any reading above 50 indicates growth.

“The euro zone economy retained encouragingly resilient growth in May, as a beleaguered manufacturing sector was offset by a buoyant service sector,” said Chris Williamson, chief business economist at S&P Global.

“Although factories continue to report widespread supply constraints and diminished demand for goods amid elevated price pressures, the economy is being boosted by pent-up demand for services as pandemic-related restrictions are wound down,” he added.

May’s services PMI fell to 56.3 from 57.7, well below the 57.5 predicted in the Reuters poll, as sharply rising prices kept some consumers cautious.

Demand for services weakened – the new business sub-index fell to 55.2 from 56.6 – but firms did increase headcount at a faster rate than in April.

A flash PMI covering the manufacturing industry fell to 54.4 this month from 55.5, worse than the 54.9 predicted in a Reuters poll and its lowest since November 2020. But the output index, which feeds into the composite PMI, rose to 51.2 from 50.7.

Renewed Covid-19 lockdowns in China and Russia’s invasion of Ukraine have disrupted supply chains that were only just recovering from the pandemic, sending costs soaring and limiting access to raw materials.

Manufacturing input and output prices both remained high and factory managers passed on the increasing costs of materials to customers. The output prices index only nudged down from April’s record high of 77.3 to 76.

Inflation in the euro zone was a record 7.4% in April, official data showed last week, and a recent Reuters poll of economists predicted the European Central Bank would raise its deposit rate in July.

Suggesting more momentum might be lost, the future output index, which monitors expectations for the year ahead fell to 59.6 from 60.5, its lowest since July 2020.

“It remains to be seen how long this service sector rebound can persist for, especially given the rising cost of living, and the weakness of manufacturing remains a concern, as the factory malaise is already showing signs of spilling over to some parts of the services economy,” Williamson said.