Business activity in the euro zone increased by the most in a year: is there a recovery?

Private sector activity in the euro area shows encouraging growth in May, driven by strong expansion in the services sector and reduced contraction in the manufacturing sector.

The services sector continued to grow this month, with the latest HCOB flash Services PMI from S&P Global reporting a score of 53.3. This number exceeds the critical threshold of 50 that separates expansion from contraction. This corresponds to last month’s 53.3, but is slightly below the expected 53.5.

In the manufacturing sector, the pace of decline moderated, with the flash PMI rising to 47.4 from the previous 45.7, well above the forecast of 46.2.

The HCOB Flash Eurozone Composite PMI – a key indicator of the overall health of the economy – rose to 52.3 in May from 51.7 in April, exceeding the expected 52 and recording the highest growth rate in a year.

However, significant differences emerged between the two largest euro zone economies. In Germany, economic activity exceeded expectations in both the services and manufacturing sectors. Meanwhile, France experienced a slowdown in the services sector, which pushed the broader Composite PMI back into declining territory.

Private sector activity in Germany signals a strong recovery

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

The services PMI rose to 53.9 from 53.2, beating expectations of 53.5 and signaling the fastest growth since June 2023. The manufacturing PMI rose to 45.4 from 42.5 in April, beating forecasts of 43. 1.

“These numbers give hope. The industrial production index reached a 13-month high in May, while the recovery in the services sector gained momentum. As a result, the composite PMI currently 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 in the German manufacturing sector amid rising export orders. He noted: “Those who predict prolonged weakness in the German economy may soon be proved wrong.”

He also emphasized that improving production and new businesses, including increased demand from abroad and tourism, contributed to the positive outlook. Additionally, he noted that companies are more optimistic about their future operations, as evidenced by a much higher hiring rate.

The services sector in France is slowing down

The main HCOB Flash France Composite PMI Output Index fell to 49.1 in May from 50.5 in April, marking the first decline in 2024 and moving from expansion to contraction.

This decline was primarily due to a new downturn in the service business, which is the most important in the Composite PMI and causes the index to fall below the critical threshold of 50.0.

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

“The global environment has a major impact on the French economy,” commented Norman Liebke, economist at Hamburg Commercial Bank.

Liebke assured that input prices remain elevated due to higher wages and rising energy costs, and that the ongoing crisis in the Middle East is contributing to the challenges.

However, as Liebke noted, despite the overall economic downturn, there were some positive signs. He explained that although the PMI HCOB Composite Output fell below 50 in May, there was no reason for major concern. Demand increased for the first time in over a year, and employment continues to grow dynamically.

Activity in the services sector declined, but only slightly and at a much slower pace compared to previous months. Moreover, the French manufacturing sector is gradually recovering.

European stocks and the euro are reacting positively

Market reactions following the May flash PMI release were broadly positive for all euro area financial assets.

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

Shares also gained, with the Euro Stoxx 50 index rising 0.4%, helped by positive signals from the U.S. after Nvidia beat forecasts for first-quarter earnings and revenue.

Among the 50 largest European stocks, Dutch chipmaker ASML Holding was the biggest gainer, up more than 3.5%, followed by Schneider Electric with 1.9% and SAP with 1.3%.

The Euro Stoxx 600 increased by 0.2%.