The European Central Bank is expected to cut interest rates for the first time in nearly five years when it meets on Thursday after a private business survey showed economic activity expanding at the fastest pace in a year while inflation slowed.
The latest HCOB Purchasing Managers' Index (PMI) data compiled by S&P Global showed private sector output expanded in most euro area economies after growth in Germany, Italy and Spain was slightly offset by weakness in France.
Ahead of European elections this week, he said companies were raising prices more slowly than in April, despite raw material and other input costs rising above pre-pandemic levels, leading to lower inflation across the euro zone.
The headline business activity index rose to a one-year high of 52.2 in May from 51.7 in April. Any reading above 50 indicates growth.
The ECB's interest rate setters meet in Frankfurt on Thursday and are expected to cut the 4% deposit rate by 0.25 percentage points.
Financial markets are expecting European Central Bank President Christine Lagarde to resist hinting at a series of interest rate cuts this year amid concerns that inflationary pressures are building as economic growth recovers across the 20-nation currency bloc.
There were fears among borrowers that the central bank might delay cutting interest costs after official data showed euro zone inflation rose to 2.6% in May from 2.4% in April, but the rise could prove temporary if PMI data points to a new downward trend.
Unemployment across the EU fell to its lowest level on record last month and the euro zone economy expanded in the first quarter of 2023 after a moderate contraction in the second half of the year.
Bill Papadakis, Senior Strategist “After two years of stagnation, it is clear that the outlook for Europe's economic development in 2024 is positive: growth is on the rise, unemployment has fallen to record lows and inflation is normalising, meaning the ECB is ready to start cutting interest rates,” analysts at consultancy Lombard Odier said.
Among the top four countries, France was the outlier, with private sector activity contracting slightly in May, in contrast to growth in Germany, Spain and Italy. Spain consolidated its top position as growth accelerated to its highest level in 14 months.
A survey of U.S. businesses found that all industries expanded at a faster pace in May than in April except for health care, which saw its economy shrink for the second consecutive month.
S&P Global PMI said new orders in the financial sector and “increasing customer demand” boosted growth, with “six of seven monitored sectors recording expansion in output, signaling a more positive picture for U.S. companies.”
Growth in the UK services sector slowed in May, with business activity and new orders declining from 11-month highs in April, according to the S&P Services PMI.
The services sector accounts for around 75% of private sector activity, making the S&P Global PMI a closely watched survey.
The activity index slowed from high levels earlier this year, falling to 52.9 last month from 55 in April, the lowest level since November.
Joe Hayes, chief economist at S&P Global Market Intelligence, which compiles the data, said surveys of the services and manufacturing sectors showed the UK economy was losing momentum, with growth expected to slow to 0.3 percent in the second quarter from 0.6 percent in the first quarter.
He said price growth in the services sector had been the slowest in three years, providing reassurance to the Bank of England ahead of its Monetary Policy Committee meeting later this month to look to lower borrowing costs.
“Services sector selling price inflation eased for the third consecutive month, which will be very encouraging for the MPC and suggests that the trajectory of services prices is heading in the right direction,” he added.
“However, it is worth noting that the PMI's gauge of UK services inflation remains well above its pre-pandemic trend, which may lend further weight to the case for the Bank of England extending its policy easing until August.”
