Private sector activity in the eurozone unexpectedly declined in May, signaling renewed economic challenges. The Composite Purchasing Managers’ Index (PMI) fell from 50.4 in April to 49.5, missing economists’ expectations of 50.7. This marks the weakest reading since November 2024 and indicates contraction, as a PMI below 50 signals shrinking economic activity.
The drop was driven mainly by the services sector, which posted its steepest decline since January 2024. Its PMI dropped sharply to 48.9 from 50.1 in April. Manufacturing showed a modest improvement, rising to 48.4, but still remained below the growth threshold. Business confidence fell for a second consecutive month, with sentiment in services hitting its lowest point since September 2022.
Economists Cite Weak Domestic Demand as Key Factor
Cyrus de la Rubia, economist at Hamburg Commercial Bank, warned that the eurozone’s growth momentum has stalled. He noted, “The PMI data shows little to no expansion since January. In May, the private sector officially slipped back into contraction.” De la Rubia dismissed US tariffs as a cause for the downturn, explaining that manufacturing held up due to early stockpiling ahead of tariff impositions.
Manufacturers increased production for the third straight month, and new orders stabilized after a long decline that started in April 2022. Meanwhile, the services sector weakened under sluggish domestic demand. “Foreign demand is falling, but domestic demand is the real drag,” he added.
De la Rubia expects the European Central Bank (ECB) to implement cautious interest rate cuts soon. Despite falling energy prices, service-sector cost pressures remain high due to continued wage growth, keeping inflationary forces active in the services industry.
Divergent Trends in Germany and France
Germany’s Composite PMI dropped to 48.6 in May from 50.1 in April. Manufacturing showed slight improvement, rising to 48.8, but services suffered a steep decline to 47.2. De la Rubia said, “Manufacturing output has grown for three straight months. However, services contracted sharply, pulling the entire economy down.” He expressed hope that fiscal support through infrastructure and defense spending, combined with cheaper energy, will ease pressures on German producers.
In contrast, France showed minor improvement despite ongoing weakness. The Composite PMI edged up to 48.0 from 47.8. Manufacturing increased to 49.5—the highest level since February 2023—while services remained subdued at 47.4. Economist Jonas Feldhusen attributed the sluggish recovery to political instability. “Manufacturing output increased, but weak services and hiring expectations are dragging on growth,” Feldhusen explained. He also warned of squeezed profit margins due to falling output prices and rising input costs.
Markets React with Caution; Euro Holds Steady
Despite the disappointing PMI figures, the euro held steady. By mid-morning Thursday, it traded at $1.1330, unchanged from the previous day. Investor enthusiasm for the US dollar was tempered by concerns over US fiscal policy.
German government bonds showed little movement. Ten-year yields stayed at 2.65%, while two-year yields dipped to 1.83%, signaling expectations for further ECB rate cuts.
European stock markets followed the downward trend of Wall Street. The Euro STOXX 50 dropped 1.4%, with 43 of its 50 components posting losses. Germany’s DAX and France’s CAC 40 both slipped 0.7%. Italy’s FTSE MIB declined 0.9%, while Spain’s IBEX 35 lost 0.7%.