Strong growth in the euro zone’s services sector contrasted sharply with a sharp drop in manufacturing output, underscoring the unevenness of the recovery. The services PMI fell slightly to hit the lowest level in two months, while the manufacturing PMI hit a 36-month low, dragging down the overall economic recovery.
Manufacturing activity in the euro zone shrank sharply in May at the fastest pace since the pandemic shut factories three years ago, sapping momentum from growth driven by the services sector.
On May 23, according to data released by IHS Markit, a subsidiary of S&P Global,The manufacturing PMI in the euro zone in May was 44.6, which was lower than the expected 46. The previous value was 45.8, a 36-month low.
The initial value of PMI for the service industry in the euro zone in May was 55.9, higher than the expected value of 55.5, lower than the previous value of 56.2, and a new low in the past two months.
The initial value of the composite PMI in the euro zone in May was 53.3, which was lower than the expected 53.5 and the previous value of 54.1, a new low in the past three months, but still above the line of prosperity and decline.
From the perspective of countries in the euro zone, the initial value of Germany’s manufacturing PMI in May was 42.9, a new low since May 2020; France’s manufacturing PMI in May was 46.1, slightly exceeding expectations, and the service PMI and neutralization PMI were both lower than expected.
Manufacturing struggles, service sector keeps growing
The PMI report showed strong growth in the services sector contrasted with a sharp drop in manufacturing output, underscoring the unevenness of the recovery. The services PMI fell slightly, hitting a two-month low, while the manufacturing PMI struggled, hitting a 36-month low in May.
Specifically, new orders rose only slightly, at the slowest pace in four months, suggesting that demand has stalled.Among them, the new orders of the service industry performed poorly, and the situation of new orders of the manufacturing industry was even worse. The difference between the two was the largest since 2008.
On the cost side, input cost inflation in services is on the rise againinput costs in the goods-producing sector continued to decline, with the largest decline since February 2016, particularly for energy and other miscellaneous input costs.
Business confidence in the euro zone fell to a five-month low, with business concerns growing over the region’s economic outlook, particularly in manufacturing. Economists expect euro zone growth to slow to 0.2% in the second quarter amid high inflation and rising interest rates, according to economists polled by FactSet.
Cyrus de la Rubia, chief economist at Commerzbank Hamburg, commented:
Eurozone GDP is expected to keep growing in the second quarter as the services sector remains healthy, while manufacturing is a huge drag on the broader economy. Among them, the output of German manufacturing companies slammed on the brakes, and the number of new orders in France fell sharply.
The European Central Bank is in a dilemma
After a period of high interest rate environment, the ECB has reached a crossroads.
European Central Bank Vice President Luis de Guindos previously said that most of the ECB’s historic monetary tightening campaign has been completed, but there is still some way to go. Guindos did not disclose his expectations for the level of peak interest rates, but cited concerns about accelerating inflation in the services sector.
The latest PMI shows that the price growth rate of the service sector has accelerated again. In addition, the labor market in the euro zone is still strong. Even in regions with weak manufacturing industries, companies are hiring more workers. The European Central Bank may need to continue to raise interest rates to fight inflation. .
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