Thursday, June 05, 2008

Eurozone Services PMI May 2008

Euro zone services activity slipped close to contraction in May, in line with expectations, as growth took a sharp hit in France, while inflationary pressures mounted, a key survey showed on Wednesday. The RBS/NTC Eurozone Services Purchasing Managers index fell to 50.6 in May, the same level as the flash estimate and as forecast by economists, from 52.0 in April.


The rate of expansion in Germany's services sector slowed in May, hit by a deterioration in business expectations and firms' worries about rising input costs.

NTC Research's business activity index for German services firms fell to 53.8 from 54.9 in April, holding above the 50 mark separating expansion from contraction for the fourth month running but weighed down by concern about the business outlook.
The figure was marginally above the flash estimate of 53.7.

"May's PMI data point to further solid growth of activity in the German service economy, notwithstanding the ongoing underperformance of the Financial Intermediation sector," said Tim Moore, economist at NTC Economics, which compiles the data. However, the overall business outlook deteriorated in May amid weaker gains in new work and the steepest fall in backlogs for five years."

The business expectations component fell to 48.0 from 51.2 in April, registering the most pessimistic reading since November 2007. This deterioration partly reflected the sharpest decline in work in hand in almost five years, NTC said.

The deterioration in the services sector growth outlook is in harmony with other recent economic indicators from Germany which have suggested that Europe's largest economy is now slowing significantly after a reasonably dynamic first quarter.

Retail sales fell sharply for a second straight month in April and unemployment rose in May for the first time in more than two years. The fall in retail sales raised questions about Germany's ability to cope with soaring fuel and food prices. High fuel and food prices sparked an acceleration in German inflation in May to 3.0 percent from 2.4 percent in April.

The services PMI prices charged component edged up to 53.5 from 53.3 in April. Another on input prices registered 61.7, slowing from 62.7 but holding well above the 50 level separating expansion from contraction.

"Average input cost inflation remained at an elevated level in May," NTC said. "Anecdotal evidence overwhelmingly suggested that sharply rising fuel prices, as well as robust wage inflation, had driven up costs at (panel members') units in May," it added.

The rate of expansion in the French services sector was down again in May according to the NTC purchasing managers' index. The index was revised down to 50.5 from a provisional figure of 50.7, compared with a reading of 52.8 in April, and is now only just above the 50 dividing line which separates expansion from contraction.


Spain's services sector shrank for the fifth month running in May, although the pace of contraction was slightly less than in April according to the May NTC Purchasing Managers Index. Staffing levels in the sector contracted at sharpest pace of the 9 year survey record and companies were pessimistic on the outlook for one-year ahead. The PMI for the Spanish service sector stood at 43.3 in May, compared with 42.5 in April and 56.2 in May 2007.

For the first time in the near 9-year survey history, companies in the Spanish services sector were pessimistic overall regarding the outlook for activity in a year's time. The Business Expectations Index registered 49.3 from 54.7 last month.

"Cost pressures and faltering demand led many firms to believe that conditions could worsen in the year ahead," said Nathan Carroll, economist at NTC Economics.

Prices charged by the Spanish service providers fell in May, in a positive sign for Spanish inflation - the highest in the euro-zone - as companies slashed margins in an attempt to re-ignite demand. But this squeezed profit margins further for companies already crushed by higher input prices led by soaring energy costs.


The Italian services sector continued to contract in May (and contracted slightly faster than in April), according to the NTC purchasing managers' index which registered a seasonally adjusted 48.1 in May from 49.8 in April. This is now the sixth consecutive month of contraction.

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