Eurozone business activity grows as expected ECB interest rate cut looms

Business activity grew across the eurozone at the fastest rate in a year in May while inflation cooled, according to data that will be welcomed by the European Central Bank (ECB) in advance of expected interest rate cuts tomorrow.

The latest HCOB purchasing managers’ index (PMI) data, compiled by S&P Global, showed private sector output expanded in most economies covered by the euro currency after growth in Germany, Italy and Spain was only marginally offset by a downturn in France.

Ahead of European parliament elections this week, businesses said they had put up prices at a slower rate than in April, leading to lower inflation across the eurozone, despite a rise in the price of raw materials and other input costs beyond the levels seen before the pandemic.

The headline business activity index climbed to a one-year high of 52.2 in May from 51.7 in April, where a figure above 50 indicates growth.

ECB rate setters will meet in Frankfurt on Thursday and are forecast to shave 25 percentage points off its main 4.5% interest rate.

Financial markets expect the ECB president, Christine Lagarde, to resist signalling a series of rate cuts through the year after concerns that inflationary pressures are rising amid the return to growth.

There were concerns among borrowers that the central bank may delay a reduction in interest costs after official data showed eurozone inflation rose to 2.6% in May from 2.4% in April, but the increase could prove to be a blip, if the PMI data reveals a fresh downward trend.

Last month, unemployment fell to its lowest level on record across the EU and the eurozone economy expanded in the first quarter after a mild contraction in the second half of 2023.

Bill Papadakis, a senior strategist at the consultancy Lombard Odier, said: “After two years of stagnation, Europe’s economic developments in 2024 are proving positive. Growth is rising, unemployment has fallen to a record low, and normalising inflation means that the ECB is ready to start cutting interest rates.”

Of the top four economies, France roved to be the outlier after a slight contraction in private sector activity in May that contrasted with growth in Germany, Spain and Italy. Spain’s position as the top performer was solidified after the rate of growth quickened to a 14-month high.

Growth in the UK’s service sector fell back in May, according to the S&P Services PMI as business activity and new orders eased from an 11-month high in April.

The service sector covers about 75% of private sector activity, making the S&P Global PMI a closely watched survey.

Marking a slowdown from highs earlier this year, the activity index fell to 52.9 last month, the slowest since November last year, from April’s 55.

Joe Hayes, principal economist at S&P Global Market Intelligence, which compiles the data, said surveys of the services and manufacturing sectors indicated the UK economy was losing momentum and was on course to expand by 0.3% in the second quarter, down from 0.6% growth in the first quarter.

He said prices in the service sector rose at the slowest pace in three years, giving the Bank of England the comfort it needs before a meeting by its monetary policy committee (MPC) later this month to reduce the cost of borrowing.

He added: “That’s now three months on the trot that selling price inflation in the service sector has eased. This will be very encouraging to the MPC and suggests the trajectory of services prices is moving in the right direction.

“It is worth noting, however, that the PMI’s gauge of UK services inflation is still sitting well above its pre-pandemic trend, which may give more weight to those suggesting the Bank of England hold out until August to loosen policy.”