Eurozone business activity up the most in a year: Is a recovery here?

eurozone business activity up the most in a year: is a recovery here?

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Private sector activity in the Eurozone shows promising growth in May, driven by strong expansion in the services sector and a reduced contraction in the manufacturing sector.

The services sector continued to expand this month, with the latest HCOB flash Services PMI survey, compiled by S&P Global, registering at 53.3. This figure is above the critical threshold of 50, which separates expansion from contraction. It matches the previous month's 53.3 but is slightly below the anticipated 53.5.

In the manufacturing sector, the rate of contraction eased, with the flash PMI rising to 47.4 from the previous 45.7, significantly surpassing the forecast of 46.2.

The HCOB Flash Eurozone Composite PMI index – a key gauge of the overall health of the economy – climbed to 52.3 in May, up from 51.7 in April, exceeding the expected 52 and marking the highest pace of expansion in a year.

However, significant differences emerged between the Eurozone's two largest economies. In Germany, business activity surpassed expectations in both the services and manufacturing sectors. In contrast, France experienced a slowdown in the services sector, pushing the broader Composite PMI into contractionary territory again.

Germany's private sector activity signals strong recovery

The Composite PMI index climbed to 52.2 in May, up from 50.6 and above the predicted 51, marking the highest reading in a year and indicating moderate expansion in private sector activity.

The Services PMI index rose to 53.9 from 53.2, surpassing the expected 53.5 and signalling the fastest growth since June 2023. The Manufacturing PMI gauge increased to 45.4 from 42.5 in April, exceeding forecasts of 43.1.

"These numbers offer hope. The manufacturing output index reached its highest level in 13 months in May, while the recovery in the services sector has gained momentum. Consequently, the composite PMI now signals solid growth," commented Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.

Dr. de la Rubia believes this could signal a turnaround for Germany’s manufacturing sector amid rising export orders. He noted: "Those predicting prolonged weakness in the German economy might be proven wrong soon."

He also pointed out that improvements in output and new business, including increased demand from abroad and tourism, contributed to the positive outlook. Additionally, he noted that companies were more optimistic about future activity, as evidenced by a much stronger hiring pace.

France's services sector slows down

The headline HCOB Flash France Composite PMI Output Index dropped to 49.1 in May from 50.5 in April, marking its first decline in 2024 and shifting from expansion to contraction territory.

This decrease was primarily driven by a new downturn in services activity, which holds the largest weight in the Composite PMI, causing the index to fall below the critical 50.0 threshold.

Export orders continued to decline, indicating that any improvements in sales conditions were mainly due to the domestic market.

"The global environment is heavily impacting the French economy," Norman Liebke, economist at Hamburg Commercial Bank, commented.

Liebke asserted that input prices remained elevated due to higher wages and rising energy costs, with the ongoing Middle East crisis contributing to the challenges.

However, Liebke noted, there were some positive signs despite the overall downturn. He explained that, while the HCOB Composite Output PMI dipped below 50 in May, there was no cause for major concern. Demand has increased for the first time in over a year, and employment continues to grow robustly.

Services business activity did decline, but only slightly and at a much slower rate compared with previous months. Moreover, France's manufacturing sector is gradually recovering.

European equities and the euro positively react

Market reactions following May's flash PMI release were broadly positive across Eurozone financial assets.

The euro strengthened against the US dollar, with the EUR/USD pair rising to 1.0840 at 10:30 am Central European Time.

Stocks also gained, with the Euro Stoxx 50 index increasing by 0.4%, supported by positive signals from the US after Nvidia exceeded earnings and revenue forecasts in the first quarter.

Among the top 50 European equities, the top gainer was Dutch chipmaker ASML Holding, up by more than 3.5%, followed by Schneider Electric at 1.9% and SAP at 1.3%.

The Euro Stoxx 600 edged 0.2% higher.

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