Euro area
Euro area PMIs were mixed in May. PMI manufacturing was weaker than expected as it declined to 52.5 in May from 53.4 in April. PMI service increased to 53.5 in May from 53.1 in April and is at the highest level since June 2011.
The divergence might reflect that there is a lagged effect on manufacturing from the slowdown in global growth in Q1, where the US and China showed some weakness. The service sector is mostly affected by domestic demand and still looks strong.
The composite new orders index continued slightly higher and still points to GDP growth around 0.4-0.5% q/q in Q2 up from 0.2% q/q in Q1.
PMI manufacturing new orders, new export orders and the employment index were lower, but they all remained above 50. Stocks of finished goods increased and the order-inventory balance went lower in May. Hence, it no longer suggests higher PMI manufacturing in the euro area.
We believe euro PMI manufacturing will move sideways or decline slightly over the coming months as there seems to be a lagged effect from the weakness in the US and China in Q1. Looking further ahead, we expect it to pick up again.
For PMI service, future business expectations remained at a high level and were almost flat at 60.7. The incoming new business and the employment index were slightly higher in May.
We expect PMI service to continue to increase modestly. This should follow as domestic demand in the euro area will continue to improve. The strengthening is reflected in consumer confidence, which has increased to its highest level in seven years.
Germany
German PMI manufacturing was also weaker than expected as it declined to 52.9 in May from 54.1 in April. PMI service was stronger than expected and increased to 56.4 in May from 54.7 in April.
The composite new orders index suggests GDP growth around 0.8-0.9%, broadly in line with the growth rate in Q1.
For PMI manufacturing, the details were weaker than the previous month: new orders declined while stocks of finished goods were higher. Thus, the order-inventory balance declined in May and the upward trend has lost some momentum. New export orders were almost flat around 52 after they peaked at 57.2 in January.
For service PMI, incoming new business, future business expectations and the employment index are all above 50. Future business expectations were a bit lower at 57.5 in May from 58.9 in April. The other two continued higher in May.
In Germany, input and output prices in both the manufacturing and service sectors were higher in May. Only input prices in manufacturing are below 50 at 46.1 in May. Input prices in the service sector increased to 55.8 from 54.0.
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