The euro zone manufacturing PMI fell to 45.6 from 46.1 in April, below expectations of 46.5. The PMI for services rose to 52.9 from 51.5, beating expectations of 51.8 and marking an 11-month high. The composite PMI rose from 50.3 to 51.4, also the highest level in 11 months.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said the euro zone had made a “good start” in the second quarter, with GDP expanding by 0.3%, mirroring growth in the first quarter. He pointed out that this is expected.
Mr. Della Rubia outlined three factors that contribute to the sustainability of the recovery. Strong new business momentum over the past two months has prompted a more aggressive hiring policy. Service providers are expressing confidence in their pricing power. The recovery in Germany and France, the euro area's largest economies, particularly underlines the trend across the region.
But the latest figures are a key test of whether the ECB is ready to cut interest rates in June. The “accelerating rise in input costs” due to rising oil prices and wages requires close monitoring. Furthermore, the rapid pace of price increases by service sector companies suggests that “services inflation'' will continue.
Despite these inflationary pressures, the HCOB still expects the ECB to cut interest rates in June, although Dell'Albia said the ECB would continue to do so as previously suggested by Governing Council member François Villeroy de Galhau. We expect the United States to proceed with policy more cautiously, rather than adopting “realistic speed.”
Click here for the full Eurozone PMI release.
