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

LONDON (Reuters) -Euro zone business activity barely expanded in May as the dominant services industry contracted for the first time since November, weighed down by falling demand that has plagued the bloc for a year, a survey showed on Wednesday.

The HCOB Eurozone Composite Purchasing Managers' Index, compiled by S&P Global, fell to 50.2 in May from 50.4 in April, higher than a preliminary estimate of 49.5 but its weakest since February.

PMI readings above 50.0 indicate growth in activity, while those below point to a contraction.

"The euro zone economy has grown for the fifth month in a row," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, adding that the data required some goodwill as it was only marginally above the expansion threshold.

"This development is due to a slight decline in activity in the service sector, while manufacturing output showed the same moderate growth as in the previous month."

The services sector saw its business activity index drop to 49.7 from 50.1 in April, signalling a marginal contraction and its first time sub-50 in six months.

Overall new business across the euro zone has declined since June 2024, albeit at a modest rate, and the new business index dipped last month to 49.0 from 49.1. Foreign orders have fallen for more than three years, offering no support to the struggling economy.

Firms continued to work through their backlogs of orders at a moderate and slightly faster rate to compensate for the lack of new work. The services reading fell to 47.4 from 48.1.

Among the bloc's largest economies, only the southern nations showed expansion. Italy led the way with its fastest growth in more than a year, while Spain's growth slowed to a 17-month low.

France moved closer to stabilisation with its softest decline in nine months, while Germany slipped back into contraction territory.

Employment across the euro zone increased only fractionally in May, driven by service providers, while manufacturers cut jobs.

Price pressures eased across the bloc, with composite input costs rising at their slowest pace in six months and selling prices increasing at the weakest rate since October. However, the picture was mixed between sectors.

"The European Central Bank will not be entirely satisfied with the PMI price data. In the services sector, which is closely watched for inflation, the rate of increase in sales prices fell again," de la Rubia added.

Business confidence improved for the first time since January but remained subdued by historical standards, suggesting companies remain cautious about future prospects despite expectations of ECB rate cuts and potential fiscal stimulus.

The ECB will almost certainly cut interest rates on Thursday, a Reuters poll found. There was no majority among the economists surveyed by Reuters on where the deposit rate will end the year.

(Reporting by Jonathan Cable; Editing by Hugh Lawson)