Eurozone May growth hit by contraction in manufacturing

BRUSSELS: A recovery in eurozone business activity was weaker than expected this month as a deepening contraction in the bloc's manufacturing industry is increasingly holding back services firms, a survey showed.

Last month, European Central Bank President Mario Draghi raised the prospect of more support for the struggling eurozone economy if its slowdown persists and Thursday's survey is likely to add to the concerns of policymakers.

IHS Markit's Flash Composite Purchasing Managers' Index (PMI), which is considered a good guide to economic health, only nudged up to 51.6 this month from a final April reading of 51.5, below the median expectation in a Reuters poll for 51.7. "It's not only that current growth is brittle, as the surveys suggest. There are also downside risks to the outlook going forward," Morgan Stanley economists wrote to clients.

"We expect a dovish message at the central bank's June meeting." Earlier figures from Germany showed activity contracted for a fifth consecutive month in May, reflecting the toll unresolved trade disputes are having on Europe's largest economy. IHS Markit's flash Purchasing Managers' Index for manufacturing fell to 44.3 from 44.4 in April, the fifth monthly reading in a row below the 50 mark that separates growth from contraction.

Markit economist Chris Williamson said the slight fall suggested that a recession in the sector, which is more vulnerable to trade frictions than services, was bottoming out.

Markit's flash services PMI fell to 55.0 from 55.7 in the previous month. The first fall after four straight rises indicates that the sector, which has been providing the economy with growth impetus as manufacturing cools, was showing signs of stress. French business activity reached its strongest level in six months in May, a survey showed, although the impact of international trade disputes was set to ensure economic growth would remain modest at best.

Data compiler IHS Markit said its composite Purchasing Managers' Index (PMI) rose to 51.3 points in May, marking a six-month high, up from 50.1 points in April. The May level beat a Reuters forecast for a reading of 50.3 points. A reading above 50 indicates that activity is expanding, while anything below that level signifies a contraction.

IHS Markit chief business economist Chris Williamson said the growth in May showed that the impact of anti-government "yellow vests" protests was waning in France, which is the eurozone's second-biggest economy. Nevertheless, Williamson cautioned that the impact of the trade dispute between the United States and China would result in France's economic growth staying at modest levels. "We're looking at modest growth in the economy at best," he said. IHS Markit said the data pointed to eurozone GDP growth of 0.2 per cent this quarter, weaker than the 0.3 per cent predicted in a Reuters poll last month. In part due to factories completing old orders, the small increase in the key composite number was because an index measuring factory output, which feeds into the composite PMI, rose to 49.0 from 48.0.

But the flash manufacturing PMI spent its fourth month below the 50 mark separating growth from contraction, falling to 47.7 from 47.9 and disappointing expectations for a rise to 48.1.Suggesting factory managers are growing increasingly pessimistic, they cut staffing levels for the first time since August 2014. The employment index dropped to 49.0 from 50.7. The manufacturing PMI means the sector would have a 0.1-0.2 per centage point drag on an economy currently being supported by a struggling services industry, IHS Markit said.

"Concerns about manufacturing persist. The service sector continues to keep the economy afloat but at a slightly slower pace," said Bert Colijn at ING. Growth in the bloc's dominant services sector slowed and its flash PMI fell to 52.5 from 52.8, confounding expectations in a Reuters poll which predicted a modest rise to 53.0.