Euro Area: Business activity expands at fastest pace in over three years in May amid easing restrictions and soaring price pressures
The flash Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, jumped to 56.9 in May from 53.8 in April amid the gradual removal of restrictions and as the vaccine rollout gained pace. The print again surprised markets on the upside and marked the strongest reading since February 2018. Therefore, the index moved further above the 50-threshold that distinguishes expanding from contracting activity in the private sector.
In May, the services sector moved further into expansionary territory, as activity increased at the fastest pace in nearly three years and new orders rose for the first time in 10 months amid the easing of social distancing measures. Meanwhile, the manufacturing sector continued to expand strongly, albeit somewhat more mildly than in April—when it logged a record high in the survey’s history—supported by soaring new orders and a further jump in production.
Meanwhile, firms added jobs for the fourth month running as the administration of vaccines raised hopes for a robust recovery ahead. On the price front, input cost inflation intensified further, hitting an over-decade high, with costs for manufacturing companies surging at the fastest pace on record due to protracted supply shortages and robust demand. In turn, output prices rose at the fastest pace on record. Lastly, business optimism hit new highs on recovery hopes.
Assessing the Eurozone’s two largest economies, growth in business activity accelerated in both Germany and France.
Commenting on the release, Chris Williamson, chief business economist at IHS Markit, said:
“Growth would have been even stronger had it not been for record supply chain delays and difficulties restarting businesses quickly enough to meet demand, especially in terms of re-hiring. The shortfall of business output relative to demand is running at the highest in the survey’s 23-year history. This imbalance of supply and demand has put further upward pressure on prices. How long these inflationary pressures persist will depend on how quickly supply comes back into line with demand, but for now the imbalance is deteriorating, resulting in the highest-ever price pressures for goods recorded by the survey and rising prices for services”
Meanwhile, Bert Colijn, Eurozone senior economist at ING, stated:
“After two quarters of contracting GDP, the second quarter of 2021 will likely show firm growth on the back of reopening economies and strong consumer demand. Pipeline inflation pressures are on the rise too with shortages emerging and demand returning.”