Eurozone private sector activity grew at the fastest pace in a year in May. Germany’s services and manufacturing sectors performed better than expected, but France’s services sector slowed.
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Private sector activity in the euro area posted encouraging growth in May, driven by strong expansion in the services sector and contraction in the manufacturing sector.
The services sector continued to expand this month, posting a reading of 53.3 in the latest HCOB Flash Services PMI survey compiled by S&P Global. This number exceeds the critical value of 50 that separates expansion from contraction. This matched last month’s figure of 53.3, but was slightly lower than the expected figure of 53.5.
In the manufacturing sector, the contraction rate eased, and the preliminary PMI was 47.4, up from 45.7 in the previous report and significantly higher than the expected 46.2.
The HCOB Flash Eurozone Composite PMI Index, an important indicator for measuring the overall health of the economy, rose to 52.3 in May from 51.7 in April, beating expectations of 52 and marking the fastest pace of expansion for the year. .
However, major differences have emerged between the euro area’s two largest economies. In Germany, business activity exceeded expectations in both the services and manufacturing sectors. In contrast, France saw a slowdown in the services sector, with the broader composite PMI falling back into contraction territory.
German private sector activity suggests strong recovery
The composite PMI index for May was 52.2, up from 50.6 and above expectations of 51, marking the highest reading this year and indicating a modest expansion in private sector activity.
The service industry PMI index rose to 53.9 from 53.2, beating the expected 53.5 and showing the highest growth since June 2023. The manufacturing PMI index rose to 45.4 from 42.5 in April, beating expectations of 43.1.
Dr. Cyrus de la Rubia said: “These numbers give us hope. Manufacturing production reached a 13-month high in May, while the recovery in the services sector is gaining momentum. As a result, the headline PMI now shows solid growth.” Chief Economist of Hamburg Commercial Bank.
Dr. Della Rubia believes this could be a sign of an upturn in German manufacturing on the back of increased export orders. “Predictions of a prolonged slump in the German economy may soon prove wrong,” he said.
He also noted that improved production and new business, including increased demand from overseas and tourism, contributed to the positive outlook. Additionally, he noted that companies are becoming more optimistic about their future activities, as evidenced by the much faster pace of hiring.
France’s services sector slows down
The headline HCOB Flash France Composite PMI Production Index fell from 50.5 in April to 49.1 in May, marking the first decline in 2024 and moving from expansion to contraction territory.
The decline was mainly caused by a new weakness in services activity, which accounts for the most weight in the composite PMI, pushing the index below the key benchmark of 50.0.
Export orders continued to decline, indicating that the improvement in sales conditions was mainly due to the domestic market.
“The global environment has a major impact on the French economy,” said Norman Liebke, an economist at Hamburg Commercial Bank.
Liebke argued that input prices are still rising due to rising wages and rising energy costs, and that the ongoing Middle East crisis is contributing to the challenge.
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But Liebke noted that despite the overall downturn, there were some bright spots. He explained that although the HCOB composite output PMI in May was below 50, there was no major concern. Demand is increasing for the first time in more than a year, and employment continues to grow steadily.
Service business activity did decline, but the extent was small and the pace was much slower compared to the previous month. Furthermore, French manufacturing is gradually recovering.
European stocks and euro react positively
Market reaction following the release of the May PMI report was broadly positive across euro area financial assets.
The euro strengthened against the US dollar, with EUR/USD rising to 1.0840 as of 10:30 a.m. CET.
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The Euro Stoxx 50 index rose 0.4% and shares rose after Nvidia beat first-quarter profit and revenue expectations, buoyed by positive signals from the United States.
Among the top 50 European stocks, Dutch semiconductor maker ASML Holding was the biggest gainer, rising more than 3.5%, followed by Schneider Electric with 1.9% and SAP with 1.3%.
The Euro Stoxx600 rose 0.2%.
