Euro Zone Business Growth Shows Signs of Easing in May, According to Flash PMI

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The Euro zone's business growth remained resilient in May, although it showed slight signs of easing compared to previous months, according to the flash Composite Purchasing Managers' Index (PMI) released on Tuesday. The survey, compiled by S&P Global and considered a reliable indicator of overall economic health, revealed a decline in the PMI to 53.3 from April's 54.1.

While still comfortably above the 50 mark that separates growth from contraction, the reading fell slightly below the Reuters poll estimate of 53.5. Experts cautioned that despite signaling a slower pace of growth, the overall PMI results for the second quarter suggest a solid gain in GDP. However, other survey data and hard data paint a different picture.

Ricardo Amaro at Oxford Economics stated, "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."

The survey highlighted a decline in overall demand growth, as prices continued to rise sharply and indebted households faced increased borrowing costs. The new business index dropped to 50.4 from 52.5. While Germany experienced a fourth consecutive month of business activity expansion, primarily driven by the services sector, France saw a slowdown in the dominant services sector and continued contraction in manufacturing.

In the Euro zone services industry, the PMI dipped slightly from April's one-year high of 56.2 to 55.9, surpassing the Reuters poll prediction of 55.6. Although new business growth showed signs of slowing down, services firms increased employment at a strong pace. However, demand for manufactured goods declined significantly, with the factory PMI falling to 44.6, its lowest since May 2020.

The report indicated that largely healed supply chains and lower energy prices led to a decrease in input costs for factories, allowing them to cut their prices for the first time since September 2020. This may be welcome news to policymakers at the European Central Bank, who have been striving to achieve their 2.0% inflation target.

Despite the easing of prices for factories, services firms experienced faster price increases. The ECB is expected to raise rates further, adding another 25 basis points to the deposit rate in the coming months, according to a Reuters poll, even as many of its peers have paused or plan to pause rate hikes.

As the Euro zone navigates the evolving economic landscape, policymakers and market participants will closely monitor these indicators to assess the overall health and stability of the region's economy.

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