LONDON, June 1 - Growth in eurozone manufacturing lost speed in May as demand for goods stalled and supply-chain disruptions linked to the Middle East war pushed input costs to their highest level in four years, according to the latest S&P Global data.
The S&P Global Eurozone Manufacturing PMI Index decreased to 51.6 in May from April's near four-year high of 52.2, although it was slightly above a preliminary reading of 51.4. Readings above 50.0 indicate expansion in factory activity.
Chris Williamson, chief business economist at S&P Global Market Intelligence, said: "Although euro area manufacturers reported an expansion for a fourth successive month in May, the sector is showing signs of struggling under the weight of rising prices and supply disruptions emanating from the war in the Middle East."
May saw new orders stagnate, reversing sharply from April when demand grew at its fastest pace in four years as consumers brought purchases forward. Export orders fell, contributing to the overall pullback in demand.
Factory output continued to expand but at a slower clip, with the output index slipping to 51.3 in May from 52.3 in April - its weakest pace since January. Employment in the sector has now fallen for three years, and manufacturers' confidence about the year ahead, while still positive, remained below its long-run average.
On the cost side, input prices climbed at the steepest rate since May 2022. The survey cited a surge in energy and raw material prices as the principal drivers of rising costs. Firms passed some of that burden on to customers, with selling prices increasing at the fastest rate in three-and-a-half years.
Williamson added: "Factories are having to pass higher costs on to customers, which will inevitably drive up inflation in the coming months. However, demand is being hit by higher prices, with May seeing order books stall after three successive monthly improvements."
Supply chain delays intensified in May to their most severe level since June 2022, adding further upward pressure on costs and complicating production planning.
The survey highlights a challenging policy environment. It suggests central banks will want to contain the renewed inflationary pressure, but weakening demand raises the risk that aggressive interest rate increases could inflict further harm on the economy.
Reflecting that tension, a majority of economists polled in May expect the European Central Bank to raise its deposit rate this month and at least once more before year-end in an effort to prevent higher energy prices from feeding into core inflation. Inflation is expected to have moved further above the ECB's 2% target in the latest month, according to the same polling.
Implications for markets and sectors
- Manufacturing - Growth is modest but cooling, with production expanding at a reduced pace and employment under pressure.
- Energy and commodities - Rising energy and raw material costs are key drivers of input-price inflation.
- Monetary policy and financial markets - The survey underscores the ECB's dilemma between fighting inflation and supporting faltering demand, a dynamic likely to influence interest-rate expectations and fixed-income markets.