Eurozone manufacturing expands at a slower rate in May but French manufacturing contracts

The final Markit PMI Index for the eurozone fell to 52.2 last month, down from 53.4 in April, with output slowing in all eurozone states apart from the Netherlands.  The final figure was lower than an earlier Markit estimate of 52.5.

Although a Markit PMI figure above 50 indicates an expansion in the growth of the economy, the latest figure represents a "modest slowdown" for the eurozone manufacturing sector, and reflected slower rates of expansion in production, new orders and employment, the report said.

Overall employment across the zone rose for the fifth successive month in May, although the Netherlands was the only nation to signal a stronger pace of increase.

However France reported "further job cuts" in May, and was the only country to report a contraction in its manufacturing sector, Markit found.

"The decline still leaves the manufacturing economy growing at a quarterly pace of approximately 0.5% in May," said Chris Williamson, chief economist at Markit. Williamson said that the manufacturing data must be examined alongside the performance of the services economy, where early data showed the pace of expansion rising to the fastest for almost three years in May.

"Taken together, the PMI surveys are pointing to a second quarter gross domestic product increase of approximately 0.5%."

The Markit PMI reports are independently compiled monthly economic surveys of more than 20,000 selected companies in over 20 countries. The reports aim to provide economists with insight into the economy by tracking a number of variables including output, new orders, employment and prices. According to Markit, the data is used by central banks in many countries to help make decisions about interest rates.

Although the rate of manufacturing growth slowed in all eurozone nations apart from the Netherlands, France was the only nation to record a contraction in its economy in May, compared to the previous month.

"France was the weakest performer overall, being the only nation to report a decline in new business and a near-stagnant rate of increase in production," said the Markit report. "France was hit by weaker inflows of both domestic and new export orders, despite firms' attempts to shore up demand through discounted prices."

Williamson said France was one of the "main disappointments" of May's findings, adding: "France in particular is one boat which is not being lifted by the rising tide. France has slid back into contraction, suggesting much more needs to be done to address the competitiveness of the country's goods producers."

None of the countries for which data was available reported improved growth of new orders overall.  This slower rate of increase in new businesses resulted in a reduction in backlogs of work for the first time since last September.

However, the level of new export orders at euro zone manufacturers increased for the eleventh successive month in May, with all nations apart from France reporting gains in this area. Companies reported stronger demand from the US, Asia and other European markets, but the rate of increase in new export business was the lowest since last July according to the study.

Markit said that a slow down in the pace of expansion in Germany in May was "possibly linked to" recent instability in Ukraine, where some individuals and some Russian individuals and companies have been subject to sanctions by the EU and some sectors of the international community, amid concerns at Russia's recent activities in the region.  The "timing of Easter", which fell relatively late on Sunday 20 April this year, might also have played a part in Germany's slow down in May, said Markit. 

Commenting on Germany's performance, Williamson said: "Without any clear cause, the slow down in the region's largest economy will perhaps be the biggest concern for the eurozone's growth trajectory if a rebound is not forthcoming in June."

"The May drop in the manufacturing PMI will inevitably add to the clamour for policymakers to provide a renewed, substantial boost to the region's economy and ward off the threat of deflation," Williamson said. "However the case is not so clear-cut."

Williamson said: "The survey highlights some encouragingly strong national performances especially among previously troubled member states such as Spain and Italy, where productivity improvements and competitive pricing have helped boost sales. These gains suggest that long-term structural reforms are helping to lift demand."