European Economy Shows Signs of Revival Amid High Rates and Steady Demand Increase

The European economy is beginning to show signs of revival as business activity across the continent adapts to high interest rates and benefits from a gradual resurgence in both domestic and international demand, according to preliminary data from May reported by Hamburg Commercial Bank (HCOB) and S&P Global. The composite Purchasing Managers’ Index (PMI) for the Eurozone reached a year-high of 52.3 points in May, up from 51.7 points in April. A PMI above 50 points indicates an expansion in business activity, while a value below 50 points suggests a contraction.

The services sector, as in previous months, was a significant contributor to the composite index in May. Business activity in the services sector has been growing for four consecutive months, maintaining the same pace as in April with a score of 53.3 points. The manufacturing sector also showed noticeable improvement; although it remained in contraction territory, the manufacturing PMI rose to 47.4 points from 45.7 in April—marking a 15-month high. The production sub-index reached a 14-month peak, increasing to 49.6 points from 47.3 points the previous month.

Despite European companies largely halting production cuts, a decline is still anticipated in the manufacturing sector for the second quarter of 2024, according to comments from HCOB's chief economist, Cyrus de la Rubia. However, he noted that the data suggesting a return to growth in business activity provides some grounds for optimism. For instance, there is a likelihood that the Eurozone’s GDP growth could reach 1% this year, an improvement over the previously expected modest growth of between 0.6% and 0.8%.

In Germany, the largest economy in Europe, business activity expanded for the second consecutive month in May. The composite PMI stood at 52.2 points, up from 50.6 points in April. The service sector indicator reached an 11-month high of 53.9 points, up from 53.2 points in April. The industrial PMI, although still in the negative territory, also showed growth at 45.4 points after 42.5 points in April, with the production sub-index reaching 48.9 points from 45.4 points.

This revival in the European economic landscape reflects a robust adaptation to the prevailing high interest rates and an encouraging rebound in demand, setting a cautiously optimistic tone for the region's economic prospects in the near term.