Euro area’s economic activity continues to contract in May, flash PMI index remains below 50

Euro area’s economic activity continued to contract deeply in May, according to the flash PMI index, which stayed below the 50-mark in May. The PMI index rose to 30.5 in May from April 13.6, suggesting less deep contraction compared with April’s lockdowns, but readings must surpass the 50-marke in the months ahead to indicate a “re-opening” and a return towards more normal economic activity levels, noted Nordea Bank in a research report. Activity in services continued to suffer more than manufacturing activity.

The flash readings released today were largely in line with consensus expectations. China’s first PMI readings following the gradual re-opening also stayed below 50, partially guiding expectations. The months ahead should see quite high PMIs.

The composite PMI in Germany rebounded to 31.4 from 17.4 in April. The manufacturing and services PMI index came in at 36.8 and 31.4, respectively. Both the sectors continued to fall in May, although at a slower rate than in April as the readings continued to be below 50. Export sales continued to be especially soft as demand is in a slump in both sectors. This results in companies continuing to lower output prices for the third consecutive month, accommodated by lower input and commodity prices.

Moreover, firms indicate that the workforce needs to be cut, implying that Germany’s attempt to shield workers with its subsidized Kurzarbeit scheme is not expected to prevent a sharp rise in unemployment in Germany. The nation is slowly lifting its lockdown, with several shops already reopened and restrictions on restaurants, hotels and campsites lifted this week in several regions.

Meanwhile, the French composite PMI index rose to 30.5 from 11.1 as businesses became slightly less pessimistic. The deceleration in decrease in activity was mainly due to increased readings in both the manufacturing and service sectors that recorded an index of 40.3 and 29.4, respectively. The sharp falls from April were moderated on most fronts in May.

Subcomponents of new business, employment, input and output prices weakened in May, but continue to hint at solid contractions. In spite of supportive polices and easing being launched, French businesses also continue to be quite grim on their 12-month outlook, with manufacturers being the most pessimistic.