Eurozone PMIs suggest growth to continue during Q2

Today’s reading (at 52.3, up from 51.7 in April) and the upwardly revised March figure indicate the bloc’s economic activity is slowly increasing in the second quarter, which is consistent with our expectation for output to increase again slightly in Q2 after the eurozone ended a five quarter period of stagnation in Q1.

Contrary to last month, the rise in the composite PMI was driven by a monthly increase in the Manufacturing PMI instead of the Services PMI, which stayed level at 52.3. Indeed, the manufacturing PMI increased closer to the neutral mark to 47.4, up from 45.7 in April. The rise in the composite new order component, now clearly above 50, reflects some pickup in demand in the bloc after new orders contracted for a considerable period. The eurozone’s manufacturing sector remains in contractionary territory but is moving closer to stabilisation in the sectors’ activity. The details of the report show that the increase in the manufacturing PMI was due to a rise in new (export) orders as well as in output (49.6 in May). Output is now close to the 50 mark, indicating stabilisation in production. Indeed, receding energy prices have recently boosted production of energy intensive subsectors in for instance Germany.

The services sector stayed firmly in expansionary territory. As real incomes in eurozone are increasing on the back of lower inflation and still-high wage growth, services activity is expected to remain strong in the coming months. Interestingly, the services input price index – though still elevated – eased a bit in May. This possibly reflects the easing in wage growth in the eurozone.

All in all, the rise in the composite PMI is consistent with our base scenario for the eurozone economy to continue growing in Q2, following the 0.3% qoq expansion in Q1. With that said, growth will probably remain below the trend rate (we expect 0.2% qoq for Q2, which is a slight deceleration, reflecting likely payback for some temporary positive factors that lifted growth in Q1 – see also here).

French hiccup while Germany’s outlook improves.

Looking at the major national indices, the May composite PMIs for France and Germany mean the divergence in activity between core and peripheral countries get a bit smaller, despite the pullback in the French composite PMI.

In Germany both the manufacturing PMI and the services PMI improved in May compared to April, pushing the overall composite further in expansionary territory (52.2 compared to 50.6 in April). The figure reflects a slowly improving outlook for the Germany economy after a very weak 2023.

On a sectoral basis, the manufacturing PMI improved but stayed in contractionary territory (45.4 versus 42.5 in April). Industrial firms in Germany are working away backlogs, which supports current production while expectations of future orders increased. Furthermore, easing energy prices are facilitating modest production rises in energy intensive industrial subsectors. The services PMI solidified the expansion in German services (53.9 versus 53.2 in April). As consumer spending remains weak, business services activity is driving overall service sector activity.

in France, after increasing steadily since the start of the year to 50.5 in April, the composite PMI unexpectedly dropped in May to below the neutral mark (49.1). The consensus expectation was for a further expansion to 51.0. The services PMI drove this deterioration, falling back to 49.4 from 50.5. As rising real incomes and a tight labour market improve the outlook for services going forward, today’s figures are likely a hiccup. The manufacturing PMI in France rose compared to April reflecting further bottoming out in eurozone manufacturing.