The eurozone’s fragile economic recovery was dealt a blow in May as private sector activity unexpectedly slid back into contraction, raising new concerns about the region’s near-term growth prospects. Weighed down heavily by Germany’s continued economic struggles, the latest Purchasing Managers’ Index (PMI) readings from S&P Global and Hamburg Commercial Bank (HCOB) paint a sobering picture of a region still wrestling with post-pandemic adjustments, geopolitical tensions, and weak consumer demand.
The preliminary composite PMI for the eurozone fell to 49.5 in May, down from 50.4 in April. That figure marks the lowest level in six months and breaks the psychologically significant 50-point threshold—the line that separates economic expansion from contraction. Notably, economists polled by Dow Jones had expected a rebound to 50.8, making this drop both unexpected and concerning.
A Warning Sign for the Eurozone Economy
The PMI index is a closely followed leading indicator of economic health across sectors, combining data from manufacturing and services. The slip into contraction territory signals that the eurozone’s private sector is losing momentum just as hopes for a modest rebound in 2025 were starting to take hold.
May’s data is particularly significant because it challenges recent optimism driven by falling inflation rates, expectations of interest rate cuts by the European Central Bank (ECB), and early signs of a rebound in manufacturing. Instead, it suggests that underlying structural weaknesses—especially in Germany—may be harder to overcome than previously believed.
“It’s a disappointing turn of events,” said Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank. “We were seeing green shoots earlier this year, but this latest PMI data shows the roots of growth are still shallow. Demand is not recovering evenly, and businesses remain cautious.”
Services Sector Hits a Rough Patch
The downturn in May was driven largely by a sharper-than-expected contraction in the services sector. The eurozone services PMI declined to 48.9 from 50.1 in April, marking its lowest level since January 2023 and suggesting that service providers are beginning to feel the weight of weaker consumer confidence and tighter corporate spending.
The services sector, typically a bulwark during periods of industrial weakness, now appears to be faltering. This reversal could reflect households tightening their belts amid persistent inflation fatigue and businesses scaling back discretionary spending due to uncertain macroeconomic conditions.
“The reversal in services is particularly concerning,” said Katharina Utermöhl, a senior economist at Allianz. “This sector was the eurozone’s engine for much of the past year, especially when manufacturing was deeply mired in recessionary territory. Its current contraction risks pulling the entire economy down.”
A Flicker of Hope in Manufacturing
In contrast, manufacturing activity showed slight improvement, though it still remained in contraction. The manufacturing PMI for the eurozone edged up to 49.4 in May from 49.0 in April, reaching its highest level in nearly three years. While still below 50, the increase suggests that the worst may be over for the region’s factories, which have been hammered by supply chain disruptions, rising input costs, and slowing global demand.
Economists had forecast a manufacturing PMI of 49.3, meaning the actual reading slightly beat expectations. Yet, the gain was not enough to offset the decline in services, and it remains to be seen whether the nascent recovery in industry can be sustained in the coming months.
Some analysts attribute the slight upturn to improved conditions in global trade, as shipping bottlenecks ease and energy prices stabilize. Others caution that lingering geopolitical uncertainties—such as the ongoing war in Ukraine and trade tensions with China—could still weigh heavily on the sector.
Germany’s Economic Engine Stalls Again
The biggest shock came from Germany, the eurozone’s economic powerhouse, where private sector activity took a sharp and unexpected downturn. The German composite PMI sank to 48.6 in May, from 50.1 in April, well below the consensus forecast of 50.3. This marked Germany’s weakest reading in five months and underscores the country’s ongoing struggle to regain economic traction.
The services sector was hit hardest. The German services PMI plunged to 47.2 from 49.0—a 30-month low—highlighting the depth of the slowdown. Economists had expected the figure to remain near 49.2, underscoring the surprise.
On the industrial front, there was a modest bright spot. The manufacturing PMI rose to 48.8 in May from 48.4 in April, aligning with expectations and marking its highest level in nearly three years. Still, both sectors remained below the 50-point threshold, reinforcing the overall picture of a contracting economy.
“Germany’s problems run deeper than cyclical fluctuations,” said Carsten Brzeski, Global Head of Macro at ING. “High energy costs, weak export demand, and structural issues like labor shortages and an aging population are all weighing on productivity and output.”
Germany’s persistent weakness is especially problematic for the eurozone, given the country’s outsized role in driving regional growth. A prolonged slump in German output could have cascading effects on trade and investment across the bloc.
France Offers a Glimmer of Resilience
While Germany stumbled, France delivered a slightly more encouraging picture. The country’s composite PMI inched up to 48.0 from 47.8 in April, suggesting a mild improvement in overall activity despite still being in contraction territory.
In the services sector, France posted a slight uptick to 47.4 from 47.3, while manufacturing saw a more significant jump to 49.5 from 48.7—its best performance in over two years. These figures exceeded economists’ expectations and may reflect better consumer resilience and stronger domestic demand compared to its eastern neighbor.
“France is showing that it’s possible to stabilize, even in a difficult environment,” said Marie Owens Thomsen, Chief Economist at the International Air Transport Association (IATA). “If that trend continues, it could provide some support for the broader region.”
However, analysts caution against over-interpretation. “We’re still talking about contraction,” said Thomsen. “But the pace of decline is slowing, which matters in a context where every basis point of growth is valuable.”
Implications for Policy and Markets
The PMI figures come at a critical moment for the European Central Bank, which has been signaling its readiness to begin lowering interest rates as inflation continues to cool. With eurozone inflation now below 3%, the ECB is widely expected to cut rates as soon as June.
May’s PMI data could strengthen the case for an earlier rate cut. With private sector activity retreating, especially in the key services segment, the ECB may feel more urgency to provide monetary support and prevent a broader downturn.
Still, policymakers remain cautious. ECB President Christine Lagarde has emphasized the need for data-driven decisions and has warned against prematurely assuming inflation is fully under control.
Market reactions were subdued but notable. The euro weakened slightly against the dollar following the release, and bond yields edged lower across major eurozone economies as investors recalibrated their expectations for ECB policy.
Looking Ahead: Risks and Opportunities
While the eurozone is not in recession, the recovery remains unsteady. The divergence between sectors—manufacturing gradually recovering while services contract—is a key dynamic to watch in the coming months. So too is the country-level divergence, with France and smaller economies offering pockets of resilience even as Germany falters.
The next few months will be critical in determining whether May’s PMI setback is a temporary blip or the beginning of a more sustained slowdown. Much will depend on external factors—such as global trade flows, geopolitical stability, and energy prices—as well as internal policy responses.
For now, businesses, investors, and policymakers must navigate an increasingly complex environment. The eurozone’s economy is not collapsing, but its path to recovery is proving longer, more uneven, and more fragile than many had hoped.