In May, the Eurozone’s private sector activity contracted for the first time in 2023. This sudden contraction spells trouble for the region’s short and long-term economic health. The Composite Purchasing Managers’ Index (PMI) dropped to 48.6, a dip from 50.1 in April. This drop indicates a dramatic change in business sentiment. The all-important services sector suffered a heavy monthly drop-off, its first contraction in half a year. Business activity collapsed at the sharpest pace since January 2024.
While the manufacturing sector showed resilience, with PMI indicating increased production for the third consecutive month, the overall economic outlook for the Eurozone appears increasingly fragile. Services activity is shrinking, and confidence is plummeting. This added factor, paired with declining output prices, presents a very difficult situation for producers moving forward.
Declining Services Sector
Given the sensitive state of the services sector within the Eurozone, the latest PMI data could be an early indicator of this timely fragility. The latest PMI figures point to a further contraction in business activity — the first drop in overall output since November 2023. This downturn raises questions about the sustainability of recovery efforts previously observed in the region.
Dr. Cyrus de la Rubia highlighted the severity of the situation, stating, “Since January, the overall PMI has shown only the slightest hint of growth and in May, the private sector actually slipped into contraction.” Dr. de la Rubia stressed that we cannot point to US tariffs as the sole cause for this contraction. It’s not just because of outside influences. In fact, efforts to get ahead of those tariffs might partly explain why manufacturing has held up a bit better lately.
The downturn in the services sector is deepened by feeble domestic demand. “Foreign demand for services is softening, but it’s the sluggish domestic demand that seems to be dragging the sector down,” Dr. de la Rubia noted. As companies continue to navigate these hurdles, sentiment in this industry has plummeted to new lows since September of ’22.
Mixed Signals from Manufacturing
Unlike the beleaguered services sector, manufacturing in the Eurozone showed a few sparks of optimism. According to the Institute for Supply Management’s manufacturing PMI, production has picked up for three straight months. This expansion is being driven by a record-breaking spike in new orders. This would be a major reversal from recent months where orders have been in retreat.
Dr. de la Rubia commented on this performance, stating, “Manufacturing is doing better, as output has been climbing for three months in a row, and new orders are following suit.” He pointed to the fact that input costs are decreasing. This is largely attributable to the new energy costs—set to provide the manufacturing sector with much-needed relief.
Even given these bright signals from manufacturing, the overall economic environment is still quite fragile. Germany’s Composite PMI, a measure of business activity across the private sector, indicated that economic activity continues to drastically contract. By comparison, France’s Composite PMI increased modestly to 48.0 from 47.8 in April. This is a sign of the huge political pressures on both countries as they continue to sail in very choppy economic waters.
Regional Variations and Economic Outlook
Yet, looking at how well individual countries are doing within the Eurozone shows stark regional differences. Germany’s business morale found a faint hopeful note, rising to 87.5 in May from 86.9, reported the Ifo Institute. This is in stark contrast to the persistent downturn still seen in Germany’s Composite PMI.
France’s private sector remained subdued, as noted by economist Jonas Feldhusen: “France’s private sector remained subdued in May.” He elaborated further on France’s challenges, stating, “The Flash Composite PMI continues to signal contraction, reflecting the economic challenges France is facing amid domestic political instability and a fragile macroeconomic environment.”
Feldhusen pointed to a very positive development – a resurgence in manufacturing with an upturn in factory production. The services sector is in recession and worsening. “The manufacturing sector showed signs of recovery, supported by increased factory output. In contrast, the services sector deteriorated further, with weak new business and a decline in the employment outlook,” he explained.
As output prices fell below zero starting in May, the impact on profit margins started to raise alarms. “While output prices slipped into deflationary territory in May, input cost inflation accelerated, signalling a squeeze on profit margins, particularly in the services sector,” Feldhusen added.
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