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News : EU Economy Last Updated: May 21, 2015 - 11:42 AM

Eurozone economy loses growth momentum; Jobs growth rises
By Michael Hennigan, Finfacts founder and editor
May 21, 2015 - 9:36 AM

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The Eurozone economy lost growth momentum for a second successive month in May, according to the latest PMI (purchasing managers' index) survey data. However, the survey also showed that the rate of expansion remained sufficiently robust to encourage firms to take on extra staff at the fastest rate for four years. Price indices meanwhile hit three-year highs, adding to signs that deflationary pressures are receding.

Markit’s Eurozone PMI registered 53.4 in May, according to the flash reading (based on around 85% of usual monthly survey replies), down from 53.9 in April and the recent peak of 54.0 seen back in March.

Faster growth in manufacturing was offset by a slowdown in services, though the pace in the latter merely eased slightly further from March’s eight-month high to suggest a broad-based upturn remains in place. The survey suggests, however, that growth could continue to soften in June.

Growth of new business inflows moderated for a second month running to register the smallest monthly gain since February. Weaker order book growth was centred on the service sector, with manufacturing reporting the strongest inflows of new orders for just over a year, linked to improved export performance. Expectations of future growth in the service sector meanwhile slipped, dropping to a five-month low.

Backlogs of work also fell, albeit only marginally, for the first time since January, though this was largely in response to firms boosting capacity by taking on more staff. Employment rose at the fastest rate since May 2011.

The Markit survey also brought some encouraging news to a region thought by many to be facing the potential threat of deflation. Companies’ average input costs rose at the steepest rate since April 2012, driven up by a combination of higher oil prices, increased wage bills and rising import costs due to the euro’s depreciation in recent months.

Although average selling prices for goods and services continued to fall, the decline was only marginal and the smallest recorded in the current 38-month sequence of reductions. By country, Germany saw business activity grow at the weakest rate for five months, with the pace of expansion weakening in both services and manufacturing. France meanwhile continued to see only sluggish growth, albeit with the rate of expansion picking up on the near-stagnation seen in April. Growth accelerated in the service sector while manufacturing output fell at the weakest rate since January. There was better news on employment, however, with rates of job creation gathering momentum in both Germany and France, the latter enjoying its best spell of hiring in over three years.

The rest of the region outside of the 'core’ countries of Germany and France once again led the upturn. Although the rate of expansion slowed slightly in May, the region excluding France and Germany is on course for its best quarter of growth and job creation since the second and third quarters of 2007 respectively.

Chris Williamson, chief economist at Markit said: “The Eurozone’s recovery lost some of its vigour in May, with growth slowing slightly for a second successive month. At the moment the extent of the slowing is not a major concern, but will no doubt be causing some nail-biting at the ECB as policymakers await signs that quantitative easing is the panacea the region needs to achieve a robust and sustainable recovery.

"The average PMI reading for the second quarter so far points to GDP growth similar to the 0.4% expansion seen in the first three months of the year. This suggests the region is on course to expand by around 2.0% this year, which would be the best performance since 2010. However, we need to see a reversal of the current slowdown in new business growth if such a pace of expansion is to be achieved over the year as a whole. New business growth also needs to rebound to convince companies to continue hiring at anything like the rate seen in May. Job creation is running at the highest rate for four years as employers remain upbeat about the business outlook, especially in manufacturing where the weaker euro appears to be helping drive strong export sales. But there are worrying signs of confidence waning in the service sector compared to the wave of optimism seen earlier in the year.

"The survey also brought some encouraging news to a region thought by many to be facing the potential threat of deflation. With price pressures picking up to three-year highs, inflation should turn positive in coming months. The survey results suggest the German economy is on course for a reasonable expansion of 0.4% in the second quarter, but France is likely to struggle to see growth exceed 0.3%. However, it’s outside of these two ‘core’ countries where the main action appears to be, with the rest of the region enjoying its best quarter of economic growth and job creation for almost eight years.”

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