Euro zone economy slowdown sharper than expected in May: PMI

Euro zone economic growth slowed much more sharply than expected this month, a business survey showed, which along with weaker inflation suggests a stiffer policy challenge for the European Central Bank ahead.

The ECB will end its asset purchase programme this year and hike interest rates in 2019, a Reuters poll found last month, although policymakers may be concerned to see inflation pressures easing alongside weakening growth.

While the expansion still remained relatively strong, growth slowed in both of the bloc’s two biggest economies, Germany and France. Forward-looking indicators also deteriorated, suggesting no imminent bounce-back.

IHS Markit’s Euro Zone Composite Flash Purchasing Managers’ Index (PMI), seen as a good guide to economic health, sank in May to an 18-month low of 54.1 from 55.1, below all forecasts in a Reuters poll which predicted a dip to 55.0.

“It is a gloomier-looking picture than we were seeing at the turn of the year,” said Chris Williamson, chief business economist at IHS Markit. “But let’s not get too carried away with the fact we are slowing – we still have reasonably robust PMI numbers.”

He said the PMI, alongside the April reading, pointed to second quarter growth of 0.4 percent, weaker than the 0.6 percent prediction in an April Reuters poll.

A composite output price index fell to an eight-month low of 53.0 from 53.4. Euro zone inflation slowed to 1.2 percent in April, official data showed last week, moving further away from the ECB’s 2 percent target ceiling.

Despite those easing price pressures, a PMI covering the bloc’s dominant service industry slumped to 53.9 from 54.7, missing expectations for a gentle slide to 54.6.

That was its lowest reading since the start of 2017 and below all poll forecasts.

With new business growth slowing, and firms building up backlogs of work at a slower pace, optimism fell to a nine-month low. The sub-index was 64.4 compared to April’s 66.2.

It was a similarly disappointing month for manufacturers. The flash factory PMI missed expectations for a modest dip to 56.0 from 56.2, instead coming in at a 15-month low of 55.5.

An index measuring output, which feeds into the composite PMI, fell to an 18-month low of 54.5 from 56.2.

Optimism also fell among factory managers and they increased hiring at the slowest pace for nine months. The employment index dipped to 55.5 from 56.6, a nine-month low.