Eurozone business growth stalls in May as services stumble: PMI

Eurozone business activity barely expanded in May as the dominant services industry contracted for the first time since November, weighed down by falling demand that has plagued the bloc for a year, a survey showed on Wednesday.

The HCOB Eurozone Composite Purchasing Managers’ Index, compiled by S&P Global, fell to 50.2 in May from 50.4 in April, higher than a preliminary estimate of 49.5 but its weakest since February.

PMI readings above 50.0 indicate growth in activity, while those below point to a contraction.

“The euro zone economy has grown for the fifth month in a row,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, adding that the data required some goodwill as it was only marginally above the expansion threshold.

“This development is due to a slight decline in activity in the service sector, while manufacturing output showed the same moderate growth as in the previous month.”

The services sector saw its business activity index drop to 49.7 from 50.1 in April, signalling a marginal contraction and its first time sub-50 in six months.

Overall new business across the euro zone has declined since June 2024, albeit at a modest rate, and the new business index dipped last month to 49.0 from 49.1. Foreign orders have fallen for more than three years, offering no support to the struggling economy.

Firms continued to work through their backlogs of orders at a moderate and slightly faster rate to compensate for the lack of new work. The services reading fell to 47.4 from 48.1.

Among the bloc’s largest economies, only the southern nations showed expansion. Italy led the way with its fastest growth in more than a year, while Spain’s growth slowed to a 17-month low.

France moved closer to stabilisation with its softest decline in nine months, while Germany slipped back into contraction territory.

Employment across the euro zone increased only fractionally in May, driven by service providers, while manufacturers cut jobs.

Price pressures eased across the bloc, with composite input costs rising at their slowest pace in six months and selling prices increasing at the weakest rate since October. However, the picture was mixed between sectors.

“The European Central Bank will not be entirely satisfied with the PMI price data. In the services sector, which is closely watched for inflation, the rate of increase in sales prices fell again,” de la Rubia added. Business confidence improved for the first time since January but remained subdued by historical standards, suggesting companies remain cautious about future prospects despite expectations of ECB rate cuts and potential fiscal stimulus.

The ECB will almost certainly cut interest rates on Thursday, a Reuters poll found. There was no majority among the economists surveyed by Reuters on where the deposit rate will end the year.

Separately, Germany’s services sector recorded its sharpest contraction in activity in 2-1/2 years in May as weaker demand and heightened uncertainty took their toll, a survey showed on Wednesday.

The final HCOB Purchasing Managers’ Index (PMI) for the services sector fell to 47.1 in May, down from 49.0 in April, marking its lowest level since November 2022.

PMI readings below 50.0 indicate a contraction in activity, while those above point to growth.

The survey found accelerated declines in both activity and new business, while the pace of job creation slowed.

“The service sector is no longer stabilizing the overall economy, it is slowing it down,” said Hamburg Commercial Bank chief economist Cyrus de la Rubia.

Services firms in Europe’s biggest economy, which is battling to avoid a historic third year of contraction in 2025, registered a reduction in inflows of new work in May for the ninth month in a row.

Despite a recovery in business expectations from April’s recent low, confidence remained subdued by historical standards.

Nevertheless, de la Rubia said conditions for a recovery were “relatively good”.

The HCOB’s broader composite PMI index, which includes both manufacturing and services, slipped into contraction in May, falling to 48.5 from 50.1 in April, reflecting slower growth in manufacturing production and the accelerated decline in services activity.

Meanwhile, european shares rose on Wednesday with Germany’s benchmark index nearing a record high ahead of a first tax relief package aimed at kick-starting growth in the region’s largest economy.

The German cabinet wants to approve the package on Wednesday, a spokesperson from the finance ministry said earlier this week to support companies.

That would come ahead of latest survey showing euro zone business activity barely expanded in May and Germany’s services sector recorded its sharpest contraction in activity in more than two years, weighed down by falling demand that has plagued the bloc for a year.

Agencies