The Eurozone economy maintained encouraging resilient growth in May as a beleaguered manufacturing sector was offset by a buoyant services sector. Although factories continue to report widespread supply constraints and lower demand for goods amid elevated pricing pressures, the the economy is boosted by pent-up demand for services as pandemic-related restrictions are lifted.
However, it remains to be seen how long this rebound in the services sector can persist, especially given the rising cost of living, and weakness in manufacturing remains a concern as factory malaise is already showing signs. spread to some parts of the world. service economy.
Although there are signs that inflationary pressures may be peaking, with input cost inflation falling for a second consecutive month and supply constraints starting to be less widely reported, inflationary pressures remained elevated at levels unprecedented.
These strong price pressures, accompanied by resilient and reassuring GDP growth reported by surveys, should prompt ECB policymakers to adopt a more hawkish stance.
Eurozone PMI output and input cost inflation compared to ECB policy decisions
Business growth remains robust in May
The seasonally adjusted S&P Global Eurozone PMI composite production index fell slightly from 55.8 in April to 54.9 in May, according to the preliminary “flash” reading. The latest reading indicated an expansion in economic activity for the fifteenth consecutive month, with the growth rate declining only slightly to remain well above the survey’s long-term average.
The latest PMI data is consistent with the economy growing at a solid quarterly rate of 0.6% so far in the second quarter.
Eurozone PMI to GDP
Growth was led by the services sector, which recorded its second strongest expansion in the past eight months. Many consumer-facing service businesses again reported strong demand as the economy reopened after Omicron-related restrictions, leading to particularly robust growth for tourism and leisure businesses. However, the overall growth rate of the services sector has slowed compared to April, partly due to weaker expansion in financial services and industrial services, the latter in turn linked to a recent slowdown in the manufacturing industry.
Although manufacturing output growth improved slightly in May, it remained very subdued after output growth slowed to a virtual standstill in April. So far, the second quarter has consequently seen the weakest manufacturing expansion since the pandemic-related shutdowns in the second quarter of 2020.
Eurozone production PMI indices
Demand slows, driven by falling goods orders
Factory output continued to be constrained by widespread supply shortages, with the war in Ukraine and mainland China shutdowns exacerbating existing pandemic-related supply chain pressures. The lengthening of delivery times from suppliers in May continued to exceed anything recorded before the pandemic, although the number of delays reported fell slightly compared to March and April, which in turn contributed to support the growth of the automotive sector. However, many other manufacturing industries reported that supply chain delays, combined with heightened customer caution and the diversion of household spending from goods to services, led to weaker output growth or even a drop in production.
Measured broadly, new orders in the manufacturing sector fell for the first time since June 2020, contrasting with further solid growth in new business entries in the services sector, although the latter sees demand growth dip slightly from compared to the eight-month high in April.
Eurozone PMI New Orders
Similar sectoral divergences were seen in terms of backlogs: while ongoing case levels rose in manufacturing at the slowest pace since August 2020, pointing to lower production needs in the months Ahead, growth in service sector backlogs has hit its highest level since July 2021, rising at a pace rarely surpassed in the survey’s history to suggest that service providers may need to increase capacity. to meet the current growth in demand.
Hiring accelerates as service-sector payrolls post biggest increase since 2007
Similar rates of solid and improving employment growth were recorded in manufacturing and services, with the latter notably representing the largest increase in payrolls since July 2007, as companies sought to increase their capacity to operation.
Euro zone PMI employment
Price pressures recede from April peak
Average prices charged for goods and services meanwhile rose sharply, rising at a slower pace than April’s all-time high, but still registering the second largest increase ever recorded by the survey. Slightly lower inflation rates were seen for both goods and services, mainly reflecting the slower cost growth recorded during the month.
Eurozone PMI prices charged
Input cost inflation eased slightly for a second consecutive month, although the rise was still the third largest since comparable data first became available in 1998 due to soaring prices energy, rising transportation costs, broader supplier-induced increases in input prices, and rising wages. pressures. Rates of increase eased in both manufacturing and services to their lowest level since February, with the manufacturing sector reporting a particularly marked slowdown in commodity price inflation. However, the recent easing of supply chain delays suggests that pressures on industrial prices are beginning to ease.
Delivery times and prices from Eurozone suppliers
Eurozone inflation: high, but peaking?
Confidence slips again
Looking ahead, business optimism about the next 12 months has deteriorated slightly to the second lowest level recorded in the last year and a half. Confidence has fallen sharply since the outbreak of war in Ukraine as uncertainty and supply constraints caused by the Russian invasion continue to be accompanied by broader global supply chain concerns linked to China. , as well as a broader gloom over the economic outlook and high inflation. Confidence fell to the lowest since the first wave of the pandemic in manufacturing in May, but remained more resilient in services.
Eurozone business confidence
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.