Eurozone Economy Accelerates, Fuelled by Booming Service Sector

The Eurozone economy experienced its fastest growth in a year during May, primarily driven by a flourishing service sector that outpaced the ongoing contraction in manufacturing. This positive trend, revealed in a private survey, also highlighted easing price pressures, potentially providing the European Central Bank (ECB) with room to maneuver on interest rates.

HCOB’s composite Purchasing Managers’ Index (PMI), a widely recognized indicator of overall economic health, climbed to 52.2 in May, its highest level since May 2023. This figure, while slightly below the initial estimate of 52.3, marks the third consecutive month of expansion for the Eurozone.

The growth was largely fueled by the service sector, which continued its upward trajectory with a PMI reading of 53.2. This demonstrates a robust expansion, although slightly below the previous month’s 11-month high.

Conversely, the manufacturing sector showed signs of recovery, with its PMI rising to 47.3 in May from 45.7 in April, signaling a slower rate of contraction.

This overall improvement in economic activity has bolstered optimism about the future, with the composite future output index reaching its highest level since February 2022. The brightening outlook has also encouraged service firms to increase their workforce at the fastest pace in 11 months.

Significantly, price pressures have eased, with output prices rising at their slowest pace in six months. This development could offer reassurance to the ECB, which is expected to deliver a 25-basis-point interest rate cut on Thursday.

However, while the PMI price indices reflect reduced inflation pressures, they remain unusually high in the context of the current economic landscape.

In summary, the Eurozone economy is showing promising signs of recovery, driven primarily by the thriving service sector. The easing of price pressures and increased business confidence are positive developments, although the ECB will likely remain cautious as it navigates the complexities of the current economic environment.