Euro Area May's PMI: Manufacturing activity surges ahead of services in May

E uro area flash May PMI unexpectedly fell to 49.5 (consensus: 50.6) from 50.4 , a 6-month low and entering the theoretical contraction area for activity . The disappointment comes from the services sector ( chart 1 ) that decreased to 48.9 ( 16 month low) from 50.1 , with German services PMIs falling sharply. Conversely, the manufacturing sector continued to recover in May, to 49.4 ( 33 - month s high ) from 49 .0 , approaching expansionary territory for the first time since mid-2022. The composition of the composite index is mixed ( chart 2 ). New orders declined again to 48.6 while future output recovered a bit to 55.8. Regarding inflation, the pace of input price inflation remained broadly unchanged but show contrasting trends with decrease in manuf. Sector and increase in the services sector. Services down, manufacturing up Services sector disappointed again in May. The detailed survey results for the Euro area indicate that businesses anticipate a significant deterioration in activity, with marked decline s in outstanding business (-1. 8 point) and business expectations (- 1 . 1 point). The m anufactur ing sector shows new signs of improvements and appears to have passed its cyclical low. Although the future manufacturing activity remains at risk with US tariffs, recent pick up could partly reflect some front-loading effects. By country, t he German PMI disappointed, c o m ing in below consensus at 48.6, down from 50.1 in April, driven by a sharp deterioration in service activity, which dropped to 47.2 from 49.0. Meanwhile, the manufacturing sector continues to show a slight improvement at 48.8, up from 48.4. Notably, it is the first time since July 2022 that the manufacturing PMI is above the services PMI. Regarding France, the composite PMI slightly increased to 48.1 from 47.8. S ervices sector remained broadly stable , but at low levels (47.4 from 47.3), while manufacturing activity surged to 49.5 (28-month high) from 48.7 . Disappointing PMI s cement a new ECB rate cut in June With composite PMI below 50, t oday’s numbers suggest that the Euro area economy will slightly decrease in Q2 (-0.1% according to our model, chart 3 ), below our official forecast of a small +0.2% . D isappointing Euro area May PMIs cement our view of a new ECB rate cut in June and pave the way for more rate cuts in the coming months , should the disinflationary process continue as we expect .