Euro zone May business growth weaker than expected – PMI

Euro zone business growth accelerated a touch this month but not as much as expected, bogged down by a deepening contraction in the bloc’s manufacturing industry which is increasingly affecting service firms.

Last month, European Central Bank President Mario Draghi raised the prospect of more support for the struggling euro zone economy if its slowdown persists.

Today’s survey is likely to add to the concerns of policymakers.

IHS Markit’s Flash Composite Purchasing Managers’ Index (PMI), which is considered a good guide to economic health, only nudged up to 51.6 this month from a final April reading of 51.5.

This was below the median expectation in a Reuters poll for 51.7.

“We can put paid to any hopes of stronger growth in the second quarter. The economy is in a very soft patch,” said Chris Williamson, chief business economist at IHS Markit.

Williamson said the data pointed to GDP growth of 0.2% this quarter, weaker than the 0.3% predicted in a Reuters poll last month.

Partly due to factories completing old orders, the small increase in the key composite number was because an index measuring factory output, which feeds into the composite PMI, rose to 49 from 48.

But the flash manufacturing PMI spent its fourth month below the 50 mark separating growth from contraction, falling to 47.7 from 47.9 despite expectations for a rise to 48.1.

Suggesting factory managers are growing increasingly pessimistic, they cut staffing levels for the first time since August 2014. The employment index dropped to 49 from 50.7.

The manufacturing PMI means the sector would have a 0.1-0.2 percentage point drag on an economy currently being supported by a struggling services industry, Williamson said.

Growth in the bloc’s dominant services sector slowed and its flash PMI fell to 52.5 from 52.8, confounding expectations in a Reuters poll which predicted a modest rise to 53.

New export business – which also includes trade between member countries in the bloc – among services firms was hurt by weaker global growth, trade tensions and Brexit.

The sub index fell to 48.1 from 48.7, one of the weakest readings since IHS Markit began collecting the data in late 2014.

With forward-looking indicators painting a disappointing picture – overall new orders were flat, hiring slowed and backlogs of work run down – optimism was at its lowest since October 2014.

The composite future output index fell to 58.8 from April’s 60.4.

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Euro zone Q1 economic growth stronger than expected, unemployment falls

The euro zone economy grew more than expected in the first quarter, rebounding from a slump in the second half of 2018, new data showed today.

Meanwhile, unemployment in the euro zone fell to its lowest in more than a decade, the data also revealed.

But economists said the numbers gave the European Central Bank little indication of whether to continue stimulating growth with loose monetary policy or to start tightening.

The European Union’s statistics office, Eurostat, said that according to a preliminary estimate, gross domestic product in the euro zone rose 0.4% quarter-on-quarter in the first three months of 2019.

This was up from 0.2% in the fourth quarter of 2018 and 0.1% in the third.

Year-on-year, euro zone GDP rose 1.2%, the same increase as in the last quarter of 2018.

The Eurostat data include an estimate by Germany of first-quarter GDP growth in Europe’s biggest economy, which has not yet been published.

Economists polled by Reuters had expected a 0.3% quarterly increase and a 1.1% annual expansion.

“The recovery is getting old and no one should expect from a greybeard that he will continue to run at the pace he could achieve in his youth,” ING economist Peter Vanden Houte said.

“And indeed, the elderly are also more vulnerable to shocks. While there are still a number of risks (think of trade tensions, higher oil prices and the Brexit uncertainty) the improving international picture is likely to support eurozone exports in the coming months,” Vanden Houte said.

GDP growth should hover around 0.3% in the remainder of the year, he said, below ECB and European Commission forecasts of growth at 0.4% in the second half of 2019.

“Not great, but probably the best we can expect in the current stage of the cycle,” he said.

The ECB, which put off tightening monetary policy at the end of last year amid persistently weak inflation, had expected first-quarter growth of 0.2%, accelerating to 0.3% in the second quarter.

Separately, Eurostat said that euro zone unemployment fell to 7.7% of the workforce in March with 12.630 million people seeking jobs.

This was the lowest rate since September 2008 and compared to 7.8% of the workforce or 12.804 million people out of a job in February.

The fall in the number of jobless people is likely to eventually put upward pressure on consumer prices.

The ECB wants to see inflation below but close to 2% over the medium term.

“Today’s figures probably haven’t made the European Central Bank any wiser,” ING’s Vanden Houte said.

“The economy remains solid enough not to need extra stimulus. But at the same time not much has to go wrong to bring GDP growth to a standstill. In that regard, wait-and-see remains the most likely ECB monetary policy stance,” he said.

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