Economic activity in the euro zone shrank at its sharpest rate in more than two and a half years in May, according to the S&P Global Flash Euro Zone Composite Purchasing Managers’ Index (PMI), which dropped to 47.5 from 48.8 in April. This marked the second consecutive month of contraction, with any PMI reading below 50 indicating shrinking economic output [1, 2].
The downturn was largely caused by a sharp increase in living costs due to the Iran war, which pushed energy prices higher and curtailed demand across the region [1, 2]. Inflationary pressures intensified, with input price inflation reaching its highest point in three and a half years, prompting growing concerns over cost increases for businesses [1, 2].
Consumer confidence declined further in May, while business confidence hit a 32-month low. The euro zone’s labour market also deteriorated sharply, with job losses nearing a 10-year high during the month [1]. New private sector orders, including exports, fell at their fastest pace in 18 months, reflecting weakening domestic and international demand [1].
Services activity contracted at the steepest rate since February 2021, with the Flash Services PMI falling to 46.4 from 47.6 in April. Private sector activity in Germany contracted for the second consecutive month, while France’s private sector PMI dropped to its lowest level in five and a half years amid fuel and energy cost pressures [1].
In Britain, firms outside the EU experienced their widest decline in activity in over a year, affected by the economic fallout from the Iran war and ongoing political uncertainty [1, 2].
The European Commission downgraded its growth forecasts for the euro zone in May and cautioned that economic growth could worsen if energy prices peak late in the year [2]. JP Morgan analysts said, "This is the weakest level since late 2023 and, at face value, signals that the economy has been stagnating in May" [2]. Andrew Kenningham of Capital Economics added that the data "provides more evidence that the euro zone economy is at risk of contracting in Q2, while the increase in the input and output price components underlines the case for tighter monetary policy" [1].
The situation presents a challenge for policymakers balancing interest rate hikes with the need to support consumers amid rising energy prices [2]. Officials will closely monitor economic data in the coming months as the region faces pressure from elevated inflation and weakened demand.
