Improved business activity casts doubt over rate cuts

A general view shows the Alter Markt (Old Market) in the city centre of Cologne, Germany, May 12, 2024. Picture taken with long exposure. REUTERS/Jana Rodenbusch/File Poto

By Jonathan Cable

LONDON (Reuters) - Businesses across the globe broadly enjoyed an improved performance this month with activity picking up across parts of Asia and Europe, surveys showed on Thursday, giving central banks room to potentially defer cutting interest rates.

Borrowing costs were raised following the COVID-19 pandemic to combat rampant inflation but the talk has now turned as to how soon - and by how much - they will fall.

Any easing of the pain for indebted consumers will likely be welcomed by politicians. Elections are currently being held in India, the United States goes to the polls in November, and on Wednesday British Prime Minister Rishi Sunak called a national election for July 4.

The global economy is likely to carry its solid momentum for the rest of the year and into 2025, defying earlier expectations of a slowdown, according to an April Reuters poll of economists who said stronger growth than forecast was more likely than weakness.

"Central banks will start cutting but then they will continue to re-evaluate the picture and in our view will realise at the end of the year or the beginning of next year that inflation is stickier than expected," said Vincent Stamer at Commerzbank.

"So they may not complete that rate cutting cycle."

In Europe, activity expanded at its fastest pace in a year this month, supported by buoyant demand for services, while the manufacturing sector showed signs of approaching a recovery.

HCOB's preliminary composite Purchasing Managers' Index (PMI), compiled by S&P Global, climbed to 52.3 this month from April's 51.7, beating expectations in a Reuters poll for a more modest lift to 52.0. May marked its third month above the 50 level separating growth from contraction.

Overall prices charged rose at their slowest pace since November and the output prices index dropped to 52.5 from 53.7, potentially opening the door to policy easing from the European Central Bank.

ECB policymakers are widely expected to reduce interest rates when they meet in two weeks.

"The PMIs for May suggest that the euro zone economy continued to expand in Q2 while price pressures eased but remained high in the services sector," said Franziska Palmas at Capital Economics.

"The ECB is still very likely to go ahead with a rate cut in June, but if the economy continues to hold up well cuts further ahead may be slower than we had anticipated."

Germany's headline PMI was above 50 for a second consecutive month, driven by strong services activity in Europe's largest economy.

But in France, the bloc's second-biggest economy, the private sector unexpectedly shrank this month after expanding in April with the services industry joining manufacturing in reporting a contraction in activity.

Growth across British businesses cooled noticeably in May and by more than any economist polled by Reuters had predicted, its PMI showed, in an early blow for Sunak's election campaign.

Business activity in India expanded robustly in May, helped by the dominant services industry, according to its PMI that also showed exports rising at a record pace and the sharpest job addition rate in nearly 18 years.

Japan's factory activity crept into expansion for the first time in a year this month, the au Jibun Bank flash PMI showed, as manufacturing gathered pace after months of weakness.

While the Australian composite PMI remained solid, it did dip due to a continuing manufacturing downturn and a slightly weaker services performance.

(Reporting by Jonathan Cable; Editing by Hugh Lawson)