May — MNI analysts survey — April Revised from
lowest median highest
———————————————————————
Econ Sentiment 105.5 105.0 105.6 106.0 106.1 106.2
Industry 3.9 5.0 5.0 5.6 5.6 5.8
Services 9.2 10.0 10.0 10.5 10.4 —
Consumers -9.8 -12.5 -12.0 -11.5 -11.6 —
Retail -2.5 na na na -1.8 —
Construction -24.6 na na na -24.3 -24.2
———————————————————————
Business Climate: +0.99 na 1.20 na +1.28 —

PARIS (MNI) – Much as expected, economic morale in the Eurozone
eroded further in May, with declines in all main business sectors led by
industry, the European Commission said Friday. Only consumers were less
optimistic than in April.

After at 1.9-point downturn since February, the slide in the
Commission’s sentiment indicator slowed somewhat, with a 0.6-point
decline to a seven-month low of 105.5.

Alongside the erosion in other leading indicators, this clearly
points to a loss of economic momentum since the pick-up in 1Q. The
Eurozone composite PMIs and Ifo’s barometer of German business sentiment
began slipping in March as well and Belgian National Bank’s sentiment
index took second big tumble this month.

In the Commission’s survey, all the larger economies sustained
further declines in sentiment, led by the Netherlands (-4.6 points),
Italy (-2.7) and France (-1.9), with Germany barely touched (-0.1). The
headline index remained above its long-term average in Germany, France,
and the Netherlands.

Some correction in leading indicators is to be expected after the
1Q catch-up in construction and related supply sectors following the
harsh winter. But headwinds are also mounting due to soaring commodity
prices, the fallout from Japan and rising interest rates. While the
cumulative impact appears limited so far, the upswing has become more
vulnerable to eventual further shocks.

Selling price expectations eased further in all sectors of the
Commission’s survey except, again for retailing, where they increased
for tenth consecutive month. This suggests that weaker pipeline
pressures will take time to feed through to consumer prices. The May
PMIs also showed output prices slowing in the wake of weaker increases
in input costs.

Industry morale dropped more than expected in May by 1.7 points to
a six-month low, dragged down by a 4.7-point plunge in firms’ assessment
of recent output. They were also less positive about order book levels
and production prospects.

The Commission’s separate Business Climate Indicator also dropped
more than expected by 0.29 point in May to a six-month low, reflecting
rising stocks, weaker output prospects and especially a slowdown in
recent production

“The current level of the indicator remains very high, but the
drops observed over the last three months may suggest that the
acceleration phase of the recovery in industry has come to an end,” the
Commission commented.

The Eurozone factory PMI fell markedly as well this month to a
seven-month low (54.8) on a substantial slowdown in output (66.3) and
new orders (53.8).

Sentiment in the services was also weaker than analysts had
expected, as the erosion in the Commission’s index since February
accelerated with a 1.2-point drop in May to stand 2.5 points below the
long-term average. Providers reported weaker recent turnover, but were
much more worried about demand prospects in the near term.

Confidence in financial services, which is not seasonally adjusted,
fell back markedly, more than retracing the rebound in April. While this
index has fluctuated considerably since the end of last year, it is well
off recent peaks, but still comfortably above the long-term average.
Firms said recent business had slowed and expected the trend to
continue. Only the recent employment component rose.

The Eurozone services PMI slipped another 1.3 points in May after a
half-point downturn in April to a five-month low (55.4), mainly due to
slowing new business (55.0) and weaker medium-term expectations (63.9).

The Commission’s flash estimate for consumer sentiment was revised
down 0.1 point to show a 1.9-point rebound to a six-month high well
above the long-term average. Consumers noted a recovery in overall
economic activity and were significantly less pessimistic about
medium-term economic trends and job market prospects.

The improvement in households’ assessment of recent and future
family finances was much more subdued. While they reported more
purchases of big-ticket items currently, their spending outlook dropped
for the third month in a row to an historical low. This puzzling trend
may be partly explained by plans to save more and the perception of
rising inflation. Yet, fears of future inflation receded somewhat for
the second month in a row, while remaining well above average.

The further erosion in retail sentiment was due mainly to
expectations for weaker turnover. Along with a rise in inventories, this
weighed on order plans. Recent business recovered somewhat, retailers
said.

Construction sector morale weakened after a recovery in April, as
slowing recent activity outweighed a modest improve in order books.

Hiring prospects deteriorated in all business sectors in May.

–Paris newsroom +331 4271 5540; e-mail: stephen@marketnews.com

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