Euro zone services activity fell sharply to a modest pace as a high euro and oil prices ate away at companies' margins, while inflation pressures held at worrying levels, a key index showed today.
Services companies gave no signs of holding onto a mild rebound seen last month, and along with a subdued manufacturing sector, show a euro zone economy struggling to keep up any decent momentum.
The RBS/NTC Flash Eurozone Purchasing Managers Index for services companies, ranging from hotels to banks, fell to 50.6 in May from 52.0 in April, matching a 4-1/2 year low reached in January, and well below the 51.7 forecast by economists.
The closely-watched index is now only just above the 50 mark that separates growth from contraction, and there are clear signs that worse may come, particularly in view of a rising euro and surging oil prices.
Euro zone manufacturing is faring no better. The flash PMI index for the sector eased to 50.5 from 50.7 in April, in line with expectations, its lowest since August 2005. Declines across both sectors in May took the flash composite index to 51.1 from 51.9, its lowest since July 2003.
The reports will not be welcomed at the European Central Bank as it struggles to balance a difficult mix of slowing growth with surging inflationary pressures. Yet the data was largely shrugged off by financial markets.
"It was a much bigger fall in the services than expected ... Growth is slowing down here. The dilemma for the ECB is that inflation is getting worse in the near-term," said Mark Wall at Deutsche Bank.
He said there were no signs of a quick turn-around either, though expected the PMIs to hold at similar levels in coming months rather than fall below the 50 mark into contraction.
Flash data for Germany released earlier on Friday also showed a slowdown across both its manufacturing and services sectors, though holding at robust levels, while corresponding French data showed levels closer to contraction.
The euro zone services index was dragged down by falls across most main sub-indices. Noticeably, the incoming new business index fell to 50.5 in May from 51.7 the previous month, not far off the 49.8 hit in January.
A tough economic environment is also impacting hiring. The services employment index fell to 51.7 from 52.9 in April, hitting its lowest level since November 2005.
But inflationary pressures remain high. The input prices index eased only marginally to 63.4 from 63.5 in April as energy prices hurt balance sheets.
The prices charged index also edged up to 53.8 from 53.5 in April, hinting that some companies found it easier to pass on those higher costs.