×

Euro zone stuck in 'low-growth phase' as business activity falls to 16-month low

Michele Tantussi | Getty Images

There was more gloom for the euro zone on Monday with the latest flash purchasing manager's index (PMI) falling to a 16-month low despite attempts by the European Central Bank (ECB) to boost growth and business activity in the region.

The preliminary PMI from Markit showed that business activity in the 19-country region fell to 52.9 in May versus 53.0 in April, failing to meet expectations for a reading of 53.2, according to a Reuters poll of analysts.

The PMI is a composite of services and manufacturing activity in the region and the 50-point mark separates expansion from contraction.

The latest PMIs suggest that economic growth has likely slowed in the euro zone in the second quarter and that business activity was likely to remain subdued, Markit said.

"With new business growth also sliding to the lowest since January 2015, the survey data point to a strong likelihood of output growth remaining subdued or even weakening further in June," Markit said in its data release.

Commenting on the numbers, Markit's Chief Economist Chris Williamson said the data was disappointing. "The PMI is signaling lackluster GDP (gross domestic product) growth of only 0.3 percent in the second quarter."

"The forward-looking indicators also suggest that growth is more likely to weaken further than accelerate. Inflows of new work showed the smallest rise for nearly a year-and-a-half, while optimism about the business outlook in the service sector sank to its lowest since July 2015."

The data does not bode well for the ECB (European Central Bank) which has increased its already-massive stimulus program, including rate cuts and asset purchases, in a bid to stimulate growth, lending and restore inflation to the region where prices remain low and far from the bank's near-2 percent target. The last inflation reading in April revealed that the region had fallen back into deflationery territory.

Despite the central bank's efforts, Williamson said the latest data "paints a picture of a region stuck in a low-growth phase, managing to eke out frustratingly modest output and employment gains despite various ECB stimulus 'bazookas', a competitive exchange rate and households benefiting from falling prices."

His comments follow remarks by the ECB's Chief Economist Peter Praet who told a Portuguese newspaper Monday that inflation expectations could drop further as wage data indicated that long-term expectations were "de-anchoring," that is, losing credibility in the wider economic environment.

"What we say is that the risks of de-anchoring have increased, obviously," Praet told Público newspaper in an interview published on Monday, Reuters reported.

"We have seen in some countries some signs of de-anchoring in wage formation. But, this being said, we haven't concluded that inflation expectations are de-anchored."

Click here for the latest on the markets.