The Eurozone's private sector is growing at its slowest rate in 16 months despite France and Germany performing well

 
Billy Bambrough
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Eurozone employment was up in May, led by services though factories also reported a modest rise in headcounts (Source: Getty)

Eurozone private sector growth has hit a 16-month low, according to the latest survey from Markit.

The slackening suggests the stronger growth in the first three months of the year has failed to hold.

Markit's Composite Purchasing Managers' Index (PMI) edged down to 52.9 from April's 53. Any reading above 50 indicates expansion, while a reading below signals contraction.

While growth is broadly stable it's still the lowest since the start of 2015 and is the latest in a string of bad economic news out of the Eurozone, that will be beginning to cause real concern for economists.

Many firms across the single currency zone were forced to cut prices to encourage sales as they struggle to drum up new business.

The rate of manufacturing output growth was meanwhile the second-weakest since February 2015. Growth of new orders received by factories also eased.

Producers reported that domestic market conditions remained tough and softer international trade flows led to the smallest rise in new export business for 16 months.

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Growth in Germany continued to strengthen across both manufacturing and services in May with the overall pace of expansion reaching its highest since the end of last year.

France also continued its move out of stagnation, with economic output rising at the fastest pace for seven months (but still below the euro area average), as faster services growth offset an ongoing manufacturing decline.

The boost from France and Germany were offset by a further cooling of the rate of expansion outside of the big-two nations to a 17-month low.

Some good news however – Eurozone employment rose for the nineteenth month running in May, led by services though factories also reported a modest rise in headcounts. The overall rise in employment was the largest since February.

Chris Williamson, chief economist at Markit, said:

A disappointing flash Eurozone PMI for May adds further to the suggestion that the robust pace of economic growth seen in the first quarter will prove temporary.

There are signs of improving life in the ‘core’ countries of France and Germany, led mainly by their service sectors, as manufacturing continued to struggle. However, elsewhere the rate of expansion slowed to its weakest for almost one-and-a-half years.

The survey therefore paints a picture of a region stuck in a low-growth phase, managing to eke out frustratingly modest output and employment gains despite various ECB stimulus ‘bazookas’, a competitive exchange rate and households benefiting from falling prices.

Germany

May data signalled the first acceleration in German private sector activity growth in 2016 so far. The country's PMI reading rose from April’s 53.6 to a five-month high of 54.7.

Germany recorded its largest ever monthly current account surplus in March, as exports of German goods held steady in the face of global turmoil and imports dipped.

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Although output rose at a sharper rate, some German firms struggled to secure new business wins amid what Markit called "an increasingly challenging demand environment".

Despite the slowdown in new business growth, companies continued to add to their workforce numbers at a solid pace.

Jobs growth has now been reported in each of the past 31 months, with the latest increase the strongest since last December.

France

The latest flash France PMI data signalled that private sector output growth accelerated to a seven-month high in May.

That said, the rate of expansion was modest overall, coming in at 51.1, up from 50.2 in April.

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New business received by private sector firms in France increased for a second successive month in May, with the rate of growth quickening slightly, reaching a six-month high.

Howard Archer, chief UK and European economist at IHS Global Insight, said:

The European Central Bank will be far from happy with the May Eurozone purchasing managers surveys showing muted Eurozone services and manufacturing activity and overall output prices charged still falling, albeit at a slightly reduced rate.

However, the ECB is stressing that patience is needed as its enhanced stimulative measures announced in March are still to be fully enact and will take time to impact. Slightly good news for the Eurozone saw overall input prices rising at the fastest rate for 10 month in May.

Although average selling prices continued to fall in May, the rate of decrease was the lowest in the year-to-date.

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Manufacturers and service providers again both typically reported that price discounts were offered to win sales in response to softer market conditions.

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