Euro zone business growth solid in May but shows signs of easing -flash PMI

© Reuters. FILE PHOTO: People enjoy an evening drink at Place de la Contrescarpe in Paris as cafes, bars and restaurants reopen after closing down for months amid the coronavirus disease (COVID-19) outbreak in France, May 19, 2021. REUTERS/Sarah Meyssonnier

By Jonathan Cable

LONDON (Reuters) -Euro zone business growth remained resilient but slowed slightly more than thought this month as the bloc's dominant services industry lost a little of its shine and the downturn in the manufacturing sector deepened, a survey showed on Tuesday.

HCOB's flash Composite Purchasing Managers' Index (PMI) for the bloc, compiled by S&P Global (NYSE:SPGI) and seen as a good gauge of overall economic health, fell to 53.3 in May from April's 54.1.

While still comfortably above the 50 mark separating growth from contraction it was below a Reuters poll estimate for 53.5.

"Despite signalling a slower pace of growth in May, the overall PMI results so far in Q2 are, at face value, signalling a solid GDP gain. But this is at odds with other survey and hard data," said Ricardo Amaro at Oxford Economics.

"The forward-looking indicators from the PMIs also temper optimism, showing new orders growth near-stalled in May, while confidence fell to a five-month low. Overall, we remain comfortable with our subdued outlook for Q2 and beyond."

With prices still rising sharply and indebted households having to pay increased borrowing costs, overall demand growth waned sharply. The new business index dropped to 50.4 from 52.5.

In Germany, business activity expanded for a fourth month running, driven exclusively by a services sector revival that more than offset a manufacturing decline in Europe's largest economy.

But in France, activity expanded at the slowest pace in four months as manufacturing continued to contract and growth in the dominant services sector decelerated.

British services companies increased prices at a rapid pace as they saw another month of strong demand, likely adding to the Bank of England's worries about the persistence of high inflation.

A PMI for the euro zone services industry dipped from April's one-year high of 56.2 to 55.9, beating the Reuters poll prediction for a steeper fall to 55.6.

Despite a slowing of new business growth, services firms increased headcount at a strong pace - the employment index was at 55.0, albeit lower than April's 11-month high of 55.6.

Meanwhile demand for manufactured goods sank and the factory PMI fell to 44.6 from 45.8, its lowest since May 2020 when the coronavirus pandemic was cementing its grip on the world. The Reuters poll had predicted a reading of 46.0.

An index measuring output, which feeds into the composite PMI, fell to a six-month low of 46.3 from 48.5.

But largely healed supply chains and lower energy prices meant input costs for factories fell at the fastest pace in over seven years, allowing factories to cut their prices for the first time since September 2020. The output prices index sank to 49.0 from 51.6.

That may be welcome news to policymakers at the European Central Bank, who despite embarking on their most aggressive tightening path ever have so far failed to get inflation back to the 2.0% target.

However, prices charged by services firms rose faster and the ECB is expected to add another 25 basis points to the deposit rate next month and in July, despite many of its peers having already paused rate hikes or doing so soon, a Reuters poll found.

"Prices pressures are still strong with both the input and output price PMIs high by historical standards, supporting the case for the ECB to raise rates further," said Andrew Kenningham at Capital Economics.