• Europe’s private sector slipped into contraction in May, as weaker demand, rising costs and job losses dragged both the eurozone and UK into softer territory.
  • The US held up better, with manufacturing still expanding as firms rebuilt inventories, although weak demand and rising prices suggest pressure is building beneath the surface.

Economic activity across the EU and the UK took a sharp hit to their private sectors in May, with the eurozone seeing its deepest contraction in over two years, while US manufacturing growth saw support from stockpiling.

Business surveys in Europe show a darker picture of declining output, rising energy costs, and mounting job losses. Factories in the US increased their inventories to protect themselves against shortages.

Both regions, however, face mounting inflation pressures that could deepen in the months ahead.

Eurozone Contracts at Fastest Pace Since 2023

The eurozone’s private sector showed more contraction than expected. The composite PMI fell to 47.5 from April’s 48.8, reaching its lowest mark since October 2023. ⁽¹⁾

The data could mean the eurozone economy is heading for a 0.2% contraction in Q2, with new orders falling at their fastest pace in 18 months. Export demand has collapsed particularly hard, declining at the steepest rate since early 2025. ⁽²⁾

The services sector, which mainly dominates economic activity in the eurozone, contracted at its sharpest pace since February 2021, dropping to 46.4 from 47.6, and coming in well below expectations. The sector is bearing the cost of higher energy prices caused by disruptions in the Strait of Hormuz. ⁽³⁾

Companies across the eurozone have cut jobs for the fifth consecutive month, with May seeing the steepest job losses since November 2020. Excluding the pandemic period, the pace of layoffs was the largest since August 2013.

Germany Contracts for Second Straight Month

Germany, the eurozone’s largest economy, saw its composite PMI edge up slightly to 48.6 from 48.4, but remained in contraction territory. The country could now be heading for contraction in Q2 as the Iran war derails its economic recovery. ⁽⁴⁾

Services activity declined for a second month also, while manufacturing stalled after a brief uptick in April.

UK Faces Perfect Storm of Challenges

The eurozone isn’t suffering alone, the UK has also started to feel the effects. Its composite PMI dived to 48.5 from 52.6 in April, where the services sector hit its lowest level since January 2021. ⁽⁵⁾

Beyond the energy shock from the Middle East conflict, businesses in the UK cited political uncertainty around Prime Minister Keir Starmer’s future as a drag on confidence. The data suggests the UK economy could contract 0.2% in the second quarter after a strong start to the year. ⁽⁶⁾

Companies scaled back hiring for the 20th straight month, and business expectations fell to their lowest since April 2025. The Bank of England now faces a difficult choice between fighting inflation and supporting growth.

US Manufacturing Remains Robust on Stockpiling

While Europe is struggling, US manufacturing extended its rise to hit its highest level in four years as businesses boosted inventories to protect themselves from shortages and rising prices.

Manufacturing PMI came in at 55.3, jumping from April’s 54.5 and coming well above its forecast of 53.8. ⁽⁷⁾

Factories ramped up their inventories amid price and supply shocks, with input inventories rising to 11-month highs. However, stockpiling may prove temporary, as order book growth has slowed to its weakest in two years over the past three months. ⁽⁸⁾

Inflation has risen dramatically, with both input and output prices surging to their highest levels since 2022, alongside a rise in wholesale prices, signaling further inflation ahead.

Despite the ongoing expansion in manufacturing, the services sector did expand but showed signs of strain. Services PMI came in at 50.9, down from April’s 51 reading. Private sector employment fell to a 21-month low. ⁽⁹⁾

Combining both manufacturing and services readings, the composite PMI held steady at 51.7, suggesting that economic activity in the US may struggle in Q2. ⁽¹⁰⁾

Sources: ⁽¹⁾ ⁽²⁾ ⁽⁵⁾ ⁽⁶⁾ ⁽⁷⁾ ⁽⁹⁾ S&P Global, ⁽⁴⁾ ⁽⁸⁾ Reuters, ⁽³⁾ ⁽¹⁰⁾ Trading Economics