Following a better-than-expected first quarter, the euro zone's economic momentum appears to have continued into the second quarter, as the May PMI improved again. Manufacturing output jumped to 49.6, which, in a literal interpretation of the survey, means the decline in production is nearing bottom. This points to a pick-up in momentum in the manufacturing sector, driven mainly by an improvement in domestic orders for now, he noted.
The current improvement in economic activity marks a clear departure from the stagnation in which the Eurozone economy has found itself throughout 2023. A recovery in real wages is key here, but financial conditions have also eased somewhat compared to last year, and expectations for global demand have improved. This means that GDP growth of around 0.3-0.4% per quarter this year is likely.
The European Central Bank will be relieved to see inflation soften in May. The survey showed input inflation eased and output price growth slowed, especially in the services sector. The latter is something the ECB will be closely watching ahead of its interest rate decision in two weeks and could raise expectations of a rate cut despite the recovery in economic activity. However, euro zone wage growth is expected to beat earlier expectations later this morning, limiting the room for rate cuts for now.
