Euro zone private sector activity grew at the fastest pace in a year in May, with Germany's services and manufacturing sectors beating expectations while France's services sector slowed.
advertisementEuro area private sector activity showed encouraging growth in May, driven by a strong expansion in the services sector and a narrowing contraction in the manufacturing sector.
The services sector continued to expand this month, with the latest flash HCOB Services PMI survey compiled by S&P Global hitting 53.3, above the key 50 threshold that separates expansion from contraction, and the same as last month's 53.3 but slightly below the 53.5 forecast.
The rate of contraction in manufacturing eased, with the flash PMI rising to 47.4 from the previous 45.7, well above the forecast of 46.2.
The HCOB flash euro area composite PMI index, a key gauge of the overall health of the economy, rose to 52.3 in May from 51.7 in April, beating the 52 forecast and recording the highest growth rate in a year.
However, a stark difference emerged between the eurozone's two largest economies. In Germany, business activity in both the services and manufacturing sectors beat expectations. In contrast, France saw its services sector slowdown and its composite PMI fell back into contraction territory.
German private sector activity signals strong recovery
The composite PMI index rose to 52.2 in May from 50.6, above the forecast of 51 and the highest level in a year, signaling a moderate expansion in private sector activity.
The services PMI index rose to 53.9 from 53.2, beating the expected 53.5 and showing the fastest growth since June 2023. The manufacturing PMI index rose to 45.4 from 42.5 in April, beating the expected 43.1.
“These figures are encouraging: the manufacturing production index reached its highest level in 13 months in May and the services sector recovery is also gaining momentum. As a result, the composite PMI now points to solid growth,” commented Dr. Cyrus de la Rubia, chief economist at Hamburg Merkbank.
Dr de la Rubia believes this could be a sign of an upturn in German manufacturing as export orders increase, saying: “Those predicting a long-term weakening of the German economy may soon be proven wrong.”
He also noted that improving production and new business, including increased demand from overseas and tourism, contributed to the positive outlook, and that businesses were becoming more optimistic about future activity, as evidenced by a significant acceleration in the pace of hiring.
France's services sector slows
The headline HCOB flash French composite PMI production index fell to 49.1 in May from 50.5 in April, the first decline in 2024 and moving from expansion into contraction territory.
The decline was mainly due to a renewed weakness in services activity, which accounts for the largest proportion of the composite PMI, and helped the index fall below the key 50.0 threshold.
Export orders continue to decline, suggesting that the improving sales situation is mainly due to the domestic market.
“The global situation is having a huge impact on the French economy,” said Normann Liebke, an economist at Hamburg Merkbank.
Liebke argued that input prices remain high due to rising wages and energy costs, and the ongoing Middle East crisis also contributes to the challenges.
But Liebke noted there are some positive signs despite the overall economic downturn. He explained that although the HCOB composite output PMI fell below 50 in May, there's no cause for major concern. Demand is up for the first time in over a year, and employment growth remains strong.
Service sector activity did fall, but the decline was small and much slower than in the previous month. Moreover, French manufacturing is gradually recovering.
European stocks and the euro react positively
Market reaction following the release of the preliminary May PMI figures was broadly positive across euro area financial assets.
advertisementThe euro strengthened against the US dollar, with EUR/USD rising to 1.0840 at 10:30 AM CET.
Stocks also rose, with the Euro Stoxx 50 index up 0.4%, helped by positive news from the U.S. after Nvidia beat earnings and revenue expectations in the first quarter.
Among Europe's top 50 stocks, Dutch chipmaker ASML Holdings was the biggest gainer, rising more than 3.5%, followed by Schneider Electric AG, up 1.9%, and SAP AG, up 1.3%.
The Euro Stoxx 600 rose 0.2%.
