The figures brought new economic worries to the mix on top of the political ones that have rattled markets over the past two weeks, with the Stoxx 600 index falling 0.8% and 10-year government bond yields in France and Germany dropping by about 0.05%.
The unexpected slowdown casts doubt on assumptions by the European Central Bank and governments that a sustained recovery has begun.
“All indications point to a failure to pick up demand for industrial products despite an improving global economic environment,” Silas de la Rubia, chief economist at Hamburg Merchant Bank, said in a note accompanying the German data. Companies are liquidating inventories rather than replenishing them, “a clear sign that the recovery in demand is taking a hit,” de la Rubia said.
Stefan Silbe, HSBC's chief economist for Germany, said the data highlighted that Germany's recovery remains slow and dependent on global demand. Data for German exports to non-EU countries, including the key markets the United States and China, showed a 6.4% drop in May from the previous month.
De la Rubia added that the PMI data suggested the German economy would actually contract slightly in the second quarter, rather than grow slightly as previously expected, even though the services sector is still growing.
The services sector has performed better than manufacturing, a trend that has continued since the end of the pandemic and the surge in energy prices in 2022. The services sector PMI came in at 52.6 in the euro area and 53.5 in Germany, but both readings were down from the previous month.
But he's not ready to give up on the recovery theory just yet. Deutsche Bank's Mark Schattenberg said he expects Germany to grow 0.3% this quarter because wages are clearly growing faster than inflation, which many economists, including at the ECB, see as having a big impact on supporting demand for the rest of the year.
(This article has been updated to include analyst comment..
