Euro Zone Business Slumps in May, Surging Inflation Points to Q2 Contraction
Euro Zone Private Sector Activity and Economic Outlook
Sharpest Decline in 18 Months
LONDON, June 3 (Reuters) - Euro zone private sector activity shrank at the fastest rate in 18 months in May as waning demand for goods and services — a key gauge of economic health — dragged output lower for a second month while cost pressures hit their highest level in more than three years, a survey showed.
PMI Data and Economic Indicators
Composite and Services PMI
The S&P Global Eurozone Composite PMI Output Index fell to 48.5 in May from April's 48.8, its lowest reading since November 2024, but above a preliminary estimate of 47.5. The headline services PMI edged up marginally to 47.7 from 47.6, outperforming the 46.4 flash number.
Interpreting the PMI
A reading below 50.0 signals contraction.
Expert Analysis
"With business activity in the euro zone falling for a second successive month in May, it is looking increasingly likely that the economy will slip into contraction in the second quarter. The PMI data are indicating a 0.2% quarterly GDP decline barring any significant change in June," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Demand and Regional Performance
New Orders and Export Challenges
Total new orders fell for a third consecutive month with the pace of decline the second-sharpest since November 2024. Foreign demand proved a bigger drag, with export orders dropping at the fastest pace so far this year.
Country-Specific Trends
The deterioration was concentrated in the bloc's two largest economies. Germany and France both recorded contractions in private sector activity, while Italy and Spain posted marginal expansions.
Inflation and ECB Policy Response
Rising Input Costs and Output Prices
Input costs rose at their sharpest pace in 3-1/2 years, while prices charged to customers climbed to a 38-month high — the third consecutive month of accelerating output price inflation. This comes after May inflation jumped to 3.2%, according to data released on Tuesday, well above the European Central Bank's 2% target with a further rise expected as the Middle East war pushes up fuel prices.
ECB Dilemma and Interest Rate Outlook
The ECB has noted that upside risks to inflation and downside ones to growth have intensified, putting policymakers in a difficult position. Some economists say the bank's June meeting will be the one to watch, with a potential 25-basis-point hike to take its benchmark interest rate to 2.25%, though others said the bank should tread carefully before raising rates when the economy appears to be stalling and consumer confidence is waning.
Labour Market and Business Sentiment
Job Losses and Spare Capacity
With new business declining, firms reported rising spare capacity. Job losses accelerated to their fastest pace in 5-1/2 years, though the rate of shedding remained mild.
Business Confidence Trends
Business confidence recovered modestly from April, the survey showed, but remained weak by historical standards and well below levels seen before the outbreak of war in the Middle East.
(Reporting by Jonathan Cable; Editing by Hugh Lawson)
