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March 1, 2024
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Services Industry Loses Momentum as Manufacturing Downturn Deepens – Flash PMI

Services Industry Loses Momentum as Manufacturing Downturn Deepens – Flash PMI

Highlights

  • Euro zone business growth resilient but slightly slowed.
  • Services industry loses momentum, manufacturing sector deepens downturn.
  • Composite PMI falls, indicating mixed economic outlook.

Overview

Euro zone business growth showed resilience but experienced a slight slowdown this month, according to a survey published on Tuesday. The survey indicated that the bloc’s dominant services industry lost some of its momentum, while the downturn in the manufacturing sector deepened.

Euro Zone Composite PMI Dips Below Expectations

The flash Composite Purchasing Managers’ Index (PMI) for the euro zone, compiled by S&P Global and considered a reliable indicator of overall economic health, fell to 53.3 in May, down from April’s 54.1. Although still comfortably above the 50 mark that separates growth from contraction, it was slightly below the Reuters poll estimate of 53.5.

Chief Economist Forecasts Euro Zone GDP Growth

Cyrus de la Rubia, the chief economist at Hamburg Commercial Bank, commented, “Euro zone GDP is expected to have grown in the second quarter due to the healthy state of the services sector. However, the manufacturing sector remains a significant drag on the overall momentum of the economy.”

The survey revealed a sharp decrease in overall demand growth, with prices continuing to rise and indebted households facing higher borrowing costs. The new business index dropped to 50.4 from 52.5.

Services PMI Moderates but Beats Expectations

The PMI for the services industry dipped from April’s one-year high of 56.2 to 55.9, surpassing the Reuters poll prediction of a steeper decline to 55.6. Despite the slowdown in new business growth, services firms increased their workforce at a strong pace, with the employment index at 55.0, although slightly lower than April’s 11-month high of 55.6.

Manufacturing PMI Hits Lowest Level

On the other hand, demand for manufactured goods declined significantly, leading to a fall in the factory PMI to 44.6 from 45.8, the lowest level since May 2020 during the height of the coronavirus pandemic. The Reuters poll had forecast a reading of 46.0. The index measuring output, which contributes to the composite PMI, also dropped to a six-month low of 46.3 from 48.5.

However, the survey indicated that supply chains had largely recovered and energy prices had decreased, resulting in the fastest decline in input costs for factories in over seven years. Consequently, factories were able to reduce their prices for the first time since September 2020, as reflected by the output prices index falling to 49.0 from 51.6.

ECB Struggles with Inflation Target

This news may be welcomed by policymakers at the European Central Bank (ECB), who, despite their aggressive tightening measures, have struggled to achieve their 2.0% inflation target. Nonetheless, prices charged by services firms continued to rise, and the ECB is expected to raise the deposit rate by another 25 basis points next month and in July, as indicated by a Reuters poll, even though many of its counterparts have already paused or are planning to pause rate hikes.

Cyrus de la Rubia added, “The PMI price data will pose a challenge for the ECB. This is because selling prices in the services sector actually increased more than in the previous month. It is precisely the price developments in this sector that the ECB is monitoring closely.”

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