Euro Area Economic Growth at One-and-a-Half Year Low in May

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The rate of expansion in eurozone economic activity eased to a one-and-a-half year low in May. Although growth remained relatively solid, the cooling seen since the turn of the year and a similar trend in new orders suggest that the outlook for the economy is less bright than in the opening quarter.      

The final IHS Markit Eurozone PMI^® Composite Output Index posted 54.1 in May, unchanged from the earlier flash estimate and its lowest level since November 2016. The headline index has nevertheless signalled expansion in each of the past 59 months. Rates of increase eased in both the manufacturing (18-month low) and service (16-month low) sectors.

Spain showed the most resilient economic performance in May, rising to the top of the ‘big four’ PMI growth rankings and being the only nation among this group to see its pace of expansion improve (three-month high). France and Germany saw their rates of increase ease to 16- and 20-month lows respectively. Although output growth in Italy was unchanged from April, it remained the weakest performer among the ‘big-four’ for the fifth straight month. Composite PMI data for Ireland are released June 6^th.

May saw growth of eurozone new business ease to an 18-month low, with all of the big-four nations seeing slower rates of increase. Capacity pressures remained evident nonetheless, with

backlogs of work rising – albeit to the weakest extent since January 2017 – to extend the current sequence of increase to three years.

Job creation was registered for the forty-third successive month in May. The pace of growth also slowed to its weakest since last August. Rates of increase eased in Germany (17-month low), France (eight-month low) and Italy (two-month low), but accelerated in Spain (two-month high).

The combination of slower growth of output, new orders, backlogs and employment suggest that the outlook for the euro area economy is less bright than in quarter one. This was backed up by PMI data on business confidence, which showed optimism dipping to its lowest level in one-and-a-half years.

Inflation of input costs accelerated for the first time in four months in May, with rates of increase strengthening in Germany, France and Spain. In contrast, average output charges rose at the slowest pace so far in 2018, as weaker increases in Germany and Italy offset accelerations in France and Spain.

Services

The rate of expansion in eurozone service sector activity continued to cool in May. At a 16-month low of 53.8, the final IHS Markit Eurozone PMI^® Services Business Activity Index was below April’s 54.7 and the earlier flash estimate of 53.9. The headline index has nonetheless signalled growth for 58 consecutive months.

The slowdown reflected trends in Germany and France. Rates of increase eased to 20- and 16-month lows respectively, with Germany seeing the slowest expansion of services output among the ‘big four’ nations. Spain and Italy saw mild growth accelerations, to three-month highs in both cases. Services PMI data for Ireland are released on 6^th June.  

The weaker expansion of activity in the eurozone service sector was matched by the trend in new business, with new orders rising at the slowest pace in almost one-and-a-half years. All of the big four nations saw milder growth of new work received.         

Capacity constraints remained present in May, as backlogs of work rose despite the slower expansion in new orders. Outstanding business increased for the twenty-fourth month running, albeit at the slowest pace since February. Companies responded by raising employment, with job creation registered for the forty-third month in a row.

All of the ‘big-four’ nations expanded service sector employment during May. The steepest increase was in Spain, which was also the only nation to register a growth acceleration. Rates of expansion slowed in Germany (25-month low), France (eight-month low) and Italy (two-month low).

Price pressures strengthened in May, with rates of inflation in input costs and output charges both picking up. Selling prices rose in Germany, France and Spain, but fell again in Italy. 

Comment

Chris Williamson, Chief Business Economist at IHS Markit said:

“The pace of eurozone economic growth sank to a one-and-a-half year low in May, and has now slowed continually since January’s peak to suggest that the region is on course for its worst quarter since 2016.

“The survey signals GDP growth of 0.4-0.5% for the second quarter, but there is much uncertainty as to whether the pace will continue to weaken in coming months.

“On the upside, companies reported business to have been disrupted by an unusually high number of holidays in May, especially in France and Germany, suggesting growth could rebound in June. But many other companies reported that demand has softened compared to earlier in the year.

“Measured across both manufacturing and services, both new order inflows and expectations regarding future business activity have descended to 18-month lows, meaning hiring has also been scaled back. Pricing power has also waned in line with weaker growth of demand.

“The slowdown since earlier in the year has been broad-based, though Spain has shown the greatest degree of resilience. Crisis-torn Italy has meanwhile reported the weakest expansion of the four largest euro member states for the fourth month running.

“With the economic indicators turning down at the same time as political uncertainty has spiked higher, the eurozone’s outlook has darkened dramatically compared to the sunny forecast seen at the start of the year.”