Eurozone “flash” estimates for purchasing managers’ indexes (PMI) have been released today, May 23. They are initial estimates for the current month that are subject to revision.
The eurozone economy gathered pace in May, according to provisional PMI survey data provided by S&P Global. Wage data for the euro area was also released by the European Central Bank, which is still expected to cut interest rates when it next meets on June 6.
The seasonally adjusted HCOB Flash Eurozone Composite PMI Output Index rose from 51.7 in April to 52.3 in May, higher than the FactSet consensus of 52, and above the line that marks expansion from contraction (50).
“Faster increases in business activity, new orders and employment were all recorded midway through the second quarter, while business confidence hit a 27-month high,” said S&P in a note.
The main contributor in the eurozone came from the service sector, as the HCOB Flash Eurozone Services PMI Business Activity Index was unchanged from April at 53.3, slightly below consensus (53.5).
The manufacturing PMI Index surprised on the upside, coming in at 47.4 against an expectation of 46.1, reaching a 15-month high. However, it is still below the line that marks expansion from contraction. Manufacturing production continued to fall, but the rate of contraction was marginal.
Will the ECB Cut Rates on June 6?
May’s flash eurozone PMI indexes also contained some pointers for the European Central Bank (ECB) as it prepares to meet next month. The rate of inflation of both input costs and output prices softened from April, although remaining above pre-pandemic averages in each case.
Once again, the service sector was the biggest source of inflationary pressures, but the rate of rises eased to a three-year low.
“This time, there is also some good news for the European Central Bank (ECB) as the rates of inflation for input and output prices in the services sector has softened compared to the month before,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.
“This will be supportive for the apparent stance of the ECB to cut rates at the meeting on June 6. However, the better inflation outlook will be most probably not be enough for the central bank to announce that further rate cuts will follow.”
The ECB has all but promised a rate cut on June 6 and recently ECB’s president, Christine Lagarde, said she is “really confident” that eurozone inflation is under control. Other ECB policymakers have sent strong signals for several months. On May 22, Finnish bank governor and member of the ECB’s governing council Olli Rehn, told AFP that the ECB can start cuts before the Federal Reserve.
Eurozone Wages Increase are a Warning for the ECB
However, an acceleration of wages could weigh on future ECB decisions. Germany wage’s data, published on May 22 by Bundesbank, showed an increase at the fastest pace for almost a decade. Today’s figures for the overall eurozone signalled that wage growth picked up in the first quarter. According to the ECB, the negotiated wages in the euro area increased 4.7% from a year ago. This could put a setback on the pace of rate cuts, as wage pressures are a key data for ECB officials.
“The direction of nominal wage growth will be crucial in understanding not so much when the first cut will occur (which we now know with some certainty), but what the path of cuts will look like in the future,” said George Curtis, portfolio manager at TwentyFour Asset management.
