Euro zone business slowdown suggests best days may be over

  • While the expansion still remained relatively strong, growth slowed to a 20-month low in Germany.

Euro zone economic growth slowed much more sharply than expected this month, a business survey showed, which along with weaker inflation has intensified concerns there will be no return to the bloc's recent boom times.

The European Central Bank 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 easing along with growth.

While the expansion still remained relatively strong, growth slowed to a 20-month low in the bloc's largest economy, Germany, and the lowest in a year in a half in No. 2 economy France, according to the latest IHS Markit purchasing managers' surveys.

The euro sign sculpture stands outside the former European Central Bank (ECB) headquarters in Frankfurt, Germany, on Sunday, July 3, 2016.
Krisztian Bocsi | Bloomberg | Getty Images
The euro sign sculpture stands outside the former European Central Bank (ECB) headquarters in Frankfurt, Germany, on Sunday, July 3, 2016.

French unemployment also rose in the first three months of 2018, confounding economists' expectations for a decline, according to separate official data.

The euro fell to a six-month low after the German PMI data, which are released before the euro zone numbers, raised concerns a slowdown in Europe's biggest economy in recent months was more widespread than previously thought.

"Contemplating the euro zone's growth perspectives we, unfortunately, might have to refer to the famous Looney Tunes catchphrase 'That's all folks!'," noted Peter Vanden Houte, an economist at ING.

The Euro Zone Composite Flash Purchasing Managers' Index (PMI), seen as a good guide to economic activity, 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. Figures above 50.0 in the PMIs suggest expansion.

Having outpaced its peers in 2017, expanding at record levels at the turn of the year, euro zone growth has steadily weakened. Forward-looking indicators in the PMIs also deteriorated, suggesting no imminent bounce-back.

"May's fall in the euro zone PMI yet again partly reflected temporary factors, but the continued softness of the surveys in Q2 is certainly a concern. The declines in the forward-looking components are somewhat worrying," said Jessica Hinds at Capital Economics.

New business growth slowing

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

A composite output price index fell to an eight-month low of 53.0 from 53.4. Euro zone inflation slowed to 1.2 percent in April, official data showed last week, moving further away from the ECB's two percent 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. That sub-index fell to 64.4 from 66.2 in April.

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 too, slowing their hiring growth to the slowest pace for nine months. The employment index dipped to 55.5 from 56.6, a nine-month low.

But consumer confidence in the bloc likely held steady this month, a flash estimate from the European Commission is expected to show later on Wednesday.