Eurozone Bounceback Falters

Eurozone economic growth slowed much more sharply than expected this month, a business survey showed, which along with weaker inflation suggests a stiffer policy challenge for the European Central Bank ahead.

The ECB will end its asset purchase program this year and hike interest rates in 2019, a Reuters poll found last month, although policymakers may be concerned to see inflation pressures easing alongside weakening growth.

While the expansion still remained relatively strong, growth slowed in both of the bloc’s two biggest economies, Germany and France. Forward-looking indicators also deteriorated, suggesting no imminent bounceback.

IHS Markit’s Eurozone Composite Flash Purchasing Managers’ Index, seen as a good guide to economic health, sank in May to an 18-month low of 54.1 from 55.1, below all forecasts in a Reuters poll which predicted a dip to 55.0.

“It is a gloomier-looking picture than we were seeing at the turn of the year,” said Chris Williamson, chief business economist at IHS Markit. “But let’s not get too carried away with the fact we are slowing—we still have reasonably robust PMI numbers.”

He said the PMI, alongside the April reading, pointed to second quarter growth of 0.4%, weaker than the 0.6% prediction in an April Reuters poll.

IHS Markit said: "Flash PMI survey data showed business activity and new order growth slowing in May, with hiring and backlogs of work likewise exhibiting slower rates of increase. The survey also indicated that companies have become less optimistic about the outlook. There was mixed news on price trends, as cost pressures increased but selling price inflation slowed.

"It’s becoming increasingly evident that underlying growth momentum has slowed compared to late last year, especially in relation to exports. Hiring has consequently shown signs of being reined-in. More expensive oil and rising wages are meanwhile continuing to push companies’ costs higher, but weak final demand means firms are struggling to pass these higher costs on to customers.

"Some of the fog will hopefully lift with the June PMI data, providing a clearer signal of the underlying growth momentum. Until then, however, it’s likely that the disappointing May survey results will rekindle some concerns regarding downside risks facing the euro area economy."

Businesses Slowing

A composite output price index fell to an eight-month low of 53.0 from 53.4. Eurozone inflation slowed to 1.2% in April, official data showed last week, moving further away from the ECB’s 2% target ceiling.

Despite those easing price pressures, a PMI covering the bloc’s dominant service industry slumped to 53.9 from 54.7, missing expectations for a gentle slide to 54.6. That was its lowest reading since the start of 2017 and below all poll forecasts.

With new business growth slowing, and firms building up backlogs of work at a slower pace, optimism fell to a nine-month low. The sub-index was 64.4 compared to April’s 66.2.

It was a similarly disappointing month for manufacturers. The flash factory PMI missed expectations for a modest dip to 56.0 from 56.2, instead coming in at a 15-month low of 55.5.

An index measuring output, which feeds into the composite PMI, fell to an 18-month low of 54.5 from 56.2.

Optimism also fell among factory managers and they increased hiring at the slowest pace for nine months. The employment index dipped to 55.5 from 56.6, a nine-month low.

Euro Falls

The euro fell to a six-month low on Wednesday after growth in Germany’s private sector slowed in May to its lowest in more than 1-1/2 years, a survey showed, raising concerns that a slowdown in Europe’s biggest economy in recent months was more widespread than previously thought.

The single currency slumped more than half a percent to $1.1701 after IHS Markit’s flash composite PMI fell to 53.1 from 54.6 in the prior month.

Germany’s 10-year government bond yield fell to a 5-week low after the data, falling to 0.516%. It was last down 4 basis points on the day.

The euro traded mixed against its major rivals. While the euro declined against the yen, the Swiss franc and the greenback, it rose against the pound. The euro was worth 129.55 against the yen, 1.164 against the franc, 0.878 against the pound and 1.175 against the greenback.

The euro was also pressured lower by concern over political risk in Italy.

The currency pair, a proxy for risk appetite within Europe, has fallen nearly 3% since May 14 as concerns of a fiscally profligate new coalition government in Rome has raised concerns of a showdown with the European Union.