Eurozone manufacturing recovery slowed sharply in May

Final Purchasing Managers’ Index data signaled that the rebound in the Eurozone manufacturing sector continued in May. The Markit Final Eurozone Manufacturing PMI posted 55.8, slightly below the earlier flash estimate of 55.9 but still above the no-change mark of 50.0 for the eighth consecutive month and much higher than the long-run average of 51.6. Output and new orders both rose for the tenth successive months and at faster than survey average rates.

However, the sharp fall in the PMI from April’s near four-year high of 57.6 highlighted the growing fragility of the recovery. Of particular note, May saw the second-steepest slowdown in the rate of expansion of output since the survey started in 1997 (the steepest slowdown was in November 2008) and a markedly slower rate of growth of new orders.

All countries saw a deterioration in growth of output and new orders. The steepest slowdown was seen in Germany, although growth here was still the strongest of the big-four euro area national economies. Meanwhile, Greece remained the only Eurozone country to see an ongoing manufacturing recession, with the rate of contraction in output accelerating to its fastest since April last year and to a pace similar to that seen at the height of the global financial crisis.

Production rose most strongly in the investment and intermediate goods sectors, with the consumer sector again acting as a drag on growth.

Survey evidence suggested that weaker growth of new orders was mainly centered on the domestic market. In contrast, May saw new export orders rise at a rate close to March’s 10-year high. There were reports that the global economic recovery and the weak euro exchange rate had boosted sales to foreign clients. Germany – the world’s second-largest exporter – saw the fastest growth of new export orders, while Greece was the only nation to report a decline.

Part of the slowdown in output growth reflected a waning in the boost provided by the inventory cycle. May saw stocks of purchases rise for the first time in over three years and the rate of depletion in finished goods holdings ease to its weakest during the current 17-month period of reduction. Indices for both inventory measures were higher than their earlier flash estimates.

The forward-looking orders-to-inventory ratio fell sharply to an 11-month low in May. The lowest reading by far was recorded by Greece, and the sharpest easings seen for Austria, Germany and the Netherlands.

Higher levels of output and rising levels of work-in-hand encouraged manufacturers to raise employment for the first time in two years in May. However, the rate of increase was only marginal and slower than the flash estimate.

Jobs growth was the fastest since July 2008 in Germany and since June 2008 in the Netherlands, and reached a 28-month high in Austria. Staffing rose in Ireland for the first time since November 2007. But employment continued to be cut marginally in France and Italy, while steeper falls were recorded in Spain and Greece, the latter seeing the steepest cut in payrolls since March of last year.

Input prices rose for the eighth month running, with the rate of increase the fastest since July 2008 and above the flash estimate. Companies reported higher prices for commodities and energy. The weak euro also raised the cost of imported inputs. Input cost inflation was highest in France and the Netherlands, followed by Italy. The steepest acceleration, however, was seen in Ireland.

The rise in costs partly reflected supply-chain factors, with May seeing average suppliers’ delivery times lengthening at a rate largely unchanged on April’s 10-year high as suppliers struggled to meet the requirements of rising demand for raw materials.

Average output prices rose for the second month in a row in May, with charges rising across the big-four Eurozone manufacturing nations for the first time since September 2008. Greece was the only country to report lower factory gate prices.

Chris Williamson, chief economist at Markit, said: “The May PMIs highlight the speed with which uncertainty surrounding the sovereign debt crisis appears to have hit business activity. The extent to which manufacturing growth slowed in May has been exceeded only once in the survey’s 13-year history – in the aftermath of the Lehman’s collapse. All countries were affected, with growth in Germany the hardest hit by some margin. Importantly, however, the pace of growth remained robust, and the slowdown in May no doubt reflects a pay-back from April’s ultra-strong growth to some extent. Some encouragement can also be taken from export growth running at a near 10-year peak and employment up for the first time in two years. But employment lags changes in output, so may fall in coming months. And any boost to competitiveness in export markets from the weaker euro could be of limited benefit if the slowdown in demand spreads beyond Europe.”