Eurozone May PMI unexpectedly shrinks, services sector records worst performance in 16 months

The Eurozone economy unexpectedly contracted in May, with the services sector performance falling to its worst level in 16 months, while a slight improvement in manufacturing was offset by the decline in services.

On the 22nd, S&P Global released the Purchasing Managers' Index (PMI) showing:

• The Eurozone composite PMI index fell from 50.4 in April to 49.5, below analysts' previous forecast of 50.6;
• The services PMI preliminary value was 48.9, below the expected 50.5 and the previous value of 50.1;
• The manufacturing PMI preliminary value was 49.4, expected at 49.2, and the previous value was 49.

France's economic activity has contracted for nine consecutive months, with the composite PMI only slightly rising from 47.8 in April to 48, still far below the 50 threshold. Both France and Germany's services sector activities have declined.

Following the data release, the money market increased bets that the European Central Bank will cut interest rates two more times this year. The yield on Germany's two-year government bonds, sensitive to policy changes, fell by 3 basis points to 1.84%. The euro to dollar exchange rate widened its decline, dropping 0.3% to 1.1296 dollars at one point.

Eurozone Private Sector Activity Unexpectedly Contracts, Weak Services Performance is the Main Drag

According to S&P Global data, private sector activity in the Eurozone unexpectedly contracted in May. Cyrus de la Rubia, an economist at Hamburg Commercial Bank, stated:

“The Eurozone economy seems to be struggling to find its footing.”

He pointed out that while foreign demand for services has slowed, the weakness in domestic demand is the main reason dragging down the sector. The weak performance of services is a key factor leading to the overall PMI decline, indicating that the road to economic recovery in the Eurozone will be more challenging.

In May, the performance of the Eurozone manufacturing sector was better than that of services, marking the first time this has occurred since the outbreak of the pandemic. De la Rubia believes this may be related to measures taken to cope with U.S. trade tariffs, and lower oil prices may also have contributed. Eurozone manufacturing has increased production for three consecutive months, with new orders not declining for the first time since April 2022.

France Continues to Contract, Germany Faces a Winter in Services

Although the overall data is poor, the performance of individual countries within the Eurozone has varied.

France's economic activity has contracted for nine consecutive months, with the composite PMI only slightly rising from 47.8 in April to 48, still far below the 50 threshold. Jonas Feldhusen, an economist at Hamburg Commercial Bank, stated that this data reflects the economic challenges France faces under “domestic political instability and a fragile macroeconomic environment.” France's service sector activity also fell short of expectations, with companies reporting weak demand, delayed orders, and hesitant customers. The overall business outlook for the next 12 months has turned negative for the first time since November last year.

Germany's PMI data is also disappointing, with a decline in the service sector. Nevertheless, the new German government's plans to promote infrastructure reform and rebuild the military are expected to support the economy in the coming years.

Southern European countries like Spain are performing relatively well. Ryanair Holdings Plc stated that travel demand this summer is strong, thanks to people being "unwilling to travel across the Atlantic."

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