Euro-Area Recovery Stutters as China’s Factory Weakness Persists

Updated on
Photographer: Balint Porneczi/Bloomberg

The euro area’s economic recovery stuttered in May as Germany lost momentum, while weakness in China’s manufacturing industry persisted.

Markit Economics said its composite index of services and manufacturing in the euro zone slipped to 53.4 from 53.9 in April. While that’s above the 50 mark that divides expansion from contraction, it’s less than the 53.9 forecast by economists in a Bloomberg survey. A Chinese factory gauge came in at 49.1, missing the median estimate of 49.3.

Euro-area growth accelerated to 0.4 percent in the first quarter, and Markit said its surveys indicate a similar pace will be achieved in the current three months. Nevertheless, with global demand showing signs of faltering, the recovery in Europe isn’t yet assured even as it benefits from central-bank stimulus and a weaker euro.

“The euro zone’s recovery lost some of its vigor in May,” said Chris Williamson, chief economist at Markit. “At the moment the extent of the slowing is not a major concern, but will no doubt be causing some nail-biting at the ECB as policymakers await signs that quantitative easing is the panacea the region needs.”

Germany’s composite gauge dropped to 52.8 in May from 54.1 in April, with both the services and manufacturing measures declining. France’s composite measure rose to 51 from 50.6 in April. The reading was in line with the median forecast of economists surveyed by Bloomberg.

Still Optimistic

Markit said its euro-region survey suggests that growth could continue to soften in June, with the increase in new business inflows moderating for a second month. Weaker order-book growth was centered on services, with manufacturing reporting the strongest new orders in just over a year.

The euro rose against the dollar and was up 0.6 percent at $1.1155 as of 10:33 a.m. London time.

Teunis Brosens, senior economist at ING Bank NV in Amsterdam, said he remains “optimistic” on the euro-region recovery.

“Despite recent increases, oil and the euro remain substantially cheaper than a year ago,” he said. Markit’s Purchasing Managers Indexes “remain well above 50, indicating continuing expansion. All in all, while tailwinds have diminished, we still expect the euro zone to be able to attain 1.5 percent growth this year.”

In China, the manufacturing PMI has been below the key 50 level for five of the past six months. The government has escalated efforts to prevent a hard landing, adding fiscal loosening to monetary easing. In the latest moves, it relaxed financing rules for local governments in a bid to boost demand for credit, while three interest-rate cuts since November aim to lower borrowing costs.

“The policy easing hasn’t shown its effect yet,” said Ding Shuang, chief China economist at Standard Chartered Plc in Hong Kong, adding that he expects the economy to stabilize in the third quarter. “Credit supply has been sufficient, but demand has remained weak.”

Before it's here, it's on the Bloomberg Terminal. LEARN MORE