Eurozone composite PMI falls to 31-month low, points to -0.2% GDP contraction in Q2

Eurozone business activity deteriorated further in May, as the ongoing energy shock in the Middle East increasingly weighed on demand, confidence and employment across the region. The Eurozone composite PMI output index fell from 48.8 to 47.5, its lowest level in 31 months. The services PMI business activity index fell from 47.6 to 46.4, hitting its lowest level in 63 months. Manufacturing activity also declined, with the manufacturing PMI falling from 52.2 to 51.4 and the industrial production index falling from 52.3 to 51.0.

According to S&P Global’s Chris Williamson, the latest survey data suggests that the eurozone economy is now on track to contract by around -0.2% in the second quarter. “Output has now contracted for two months in a row, with the rate of decline accelerating in May to its highest level in just over two-and-a-half years,” he said. The services sector has been particularly hard hit, as rising energy costs and broader cost-of-living pressures increasingly pressure household demand. While manufacturing previously found some support from precautionary stockpiling, Williamson noted that this support is now beginning to fade as demand for goods and services weakens.

The survey also highlighted increasing risks of stagflation in the region. War-related supply chain disruptions are once again becoming more severe, raising the risk of further shortages and additional inflation pressures in the coming months. Williamson warned that the latest price measures already suggest inflation “will approach 4% in the coming months”, even as growth momentum deteriorates rapidly. A combination of slowing activity, rising job losses and persistent inflation pressures is likely to deepen the policy dilemma facing the ECB in the second half of the year.

The full Eurozone Purchasing Managers’ Index (PMI) release is here.