Euro Zone Business Activity Faces Unexpected Contraction

Euro zone business activity has unexpectedly entered a contraction phase this month, largely due to the worsening demand in its services industry, despite signs of a manufacturing rebound. The HCOB preliminary composite euro zone Purchasing Managers' Index, seen as a growth indicator, fell to 49.5 from 50.4 in April.

This decline marks the first time the index has dropped below the 50-point threshold, distinguishing growth from contraction, since the start of the year. Analysts had expected a rise to 50.7. According to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, the euro zone economy is struggling to gain momentum, showing only minimal growth hints since January.

The services PMI slipped to 48.9, its lowest since January 2024, as demand waned and optimism among service firms diminished further, with the business expectations index dropping to 54.0. Meanwhile, the manufacturing sector showed signs of recovery with the PMI inching up to 49.4. Reduced factory prices to support demand have impacted the output prices index, which fell to 49.0.

(With inputs from agencies.)