Private sector activity in the eurozone unexpectedly contracted in May for the first time this year, with weakening demand and renewed pessimism weighing on the services sector and dragging overall momentum to a six-month low.
According to preliminary data compiled by S&P Global, the eurozone’s Composite Purchasing Managers’ Index (PMI) fell to 49.5 in May from 50.4 in April, below the 50.7 expected by economists and marking the lowest reading since November 2024. A figure below 50.0 signals contraction.
May PMI reveals services contraction
The drop reflects a significant loss of momentum in services, where business activity declined for the first time in six months and at the sharpest pace since January 2024.
The services PMI dropped to 48.9, from 50.1 in April, missing expectations of 50.3. Meanwhile, manufacturing remained weak, with a PMI reading of 48.4—up slightly from April’s 48.0 but still firmly below the growth threshold.
Business sentiment also deteriorated. Confidence in the euro area edged lower for a second consecutive month, reaching its weakest level since October 2023. The decline was again particularly pronounced in services, where optimism fell to levels not seen since September 2022.
‘Do not blame tariffs for this one’
Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said the figures show an economy struggling to gain traction.
“Since January, the overall PMI has shown only the slightest hint of growth and in May, the private sector actually slipped into contraction,” he said.
“Do not blame US tariffs for this one. In fact, efforts to get ahead of those tariffs might partly explain why manufacturing has held up a bit better lately.”
De la Rubia noted that eurozone manufacturers have now increased production for a third consecutive month, with new orders no longer declining—something not seen since April 2022
Yet, the services sector—typically more shielded from external shocks—appears increasingly vulnerable.
“Foreign demand for services is softening, but it’s the sluggish domestic demand that seems to be dragging the sector down,” de la Rubia said. The result, he suggested, is a subdued outlook that aligns with cautious company sentiment and a hesitant recovery path.
According to the expert, the latest PMI data offer a mixed picture for the European Central Bank (ECB). While service-sector sales price inflation ticked down slightly from an already low level, input costs are still rising and may even be accelerating. He attributed this mainly to higher wages, as energy prices continue to fall.
Despite the continued cost pressures in services, de la Rubia said the ECB is likely to proceed with cautious interest rate cuts, especially as manufacturing purchase prices are now declining.
Germany’s contraction deepens despite manufacturing resilience
In Germany, the eurozone’s largest economy, business activity contracted further in May. The Composite PMI fell to 48.6 from 50.1 in April. While the manufacturing PMI ticked up to 48.8, services dragged the economy lower, with their index falling sharply to 47.2 from 49.0.
“Manufacturing is doing better, as output has been climbing for three months in a row, and new orders are following suit,” said de la Rubia.
“In the service sector, by contrast, activity has taken a sharper tumble, and that drop has pulled overall activity into contraction.”
Still, hopes for fiscal stimulus—particularly in infrastructure and defence—could offer support in the months ahead. “Falling input costs, especially cheaper energy, should offer manufacturers some breathing room,” de la Rubia added.
In a separate release on Thursday, Germany’s business morale, measured by the Ifo Institute, rose to 87.5 in May from 86.9, its highest level since June 2024. It marked a fifth consecutive monthly increase, diverging from S&P Global’s weaker survey data.
France sees modest improvement in factories, but services remain weak
In France, the picture remained subdued but showed signs of stabilisation. The Composite PMI edged up slightly to 48.0 in May, from 47.8 in April, as the manufacturing PMI rose to 49.5—its highest since February 2023—while services remained soft at 47.4.
“France’s private sector remained subdued in May,” said Jonas Feldhusen, junior economist at Hamburg Commercial Bank. “The Flash Composite PMI continues to signal contraction, reflecting the economic challenges France is facing amid domestic political instability and a fragile macroeconomic environment.”
Feldhusen noted a divergence between sectors: “The manufacturing sector showed signs of recovery, supported by increased factory output. In contrast, the services sector deteriorated further, with weak new business and a decline in the employment outlook.”
He flagged price dynamics as a growing concern. “While output prices slipped into deflationary territory in May, input cost inflation accelerated, signalling a squeeze on profit margins, particularly in the services sector,” he said.
Market reactions: Eurozone equities fall
Despite weaker-than-expected PMI data, the euro held firm on Thursday, supported by renewed investor scepticism toward the US dollar amid growing concerns over Washington’s fiscal outlook.
By 10:20 a.m. Central European Time, the euro was trading around $1.1330, broadly unchanged from Wednesday’s levels.
German bond markets also showed limited movement: 10-year Bund yields held steady at 2.65%, while two-year yields slipped by 3 basis points to 1.83%, reflecting expectations that the European Central Bank will continue its rate-cutting cycle.
Eurozone equities followed Wall Street’s Wednesday downturn.
The Euro STOXX 50 index fell 1.4%, with losses recorded in 43 of its components. National indices posted more moderate declines.
Germany’s DAX and France’s CAC 40 each dropped 0.7%, Italy’s FTSE MIB fell 0.9%, and Spain’s IBEX 35 lost 0.7%.
