An employee prepares pneumatic pipework on the tractor break system assembly line inside the Fendt GmbH agricultural machinery factory in Marktoberdorf, Germany, on Wednesday, Nov. 28, 2018. Healthy demand in the manufacturing sector helped boost the number of job vacancies in Germany by 23,000 to a record 1.24 million in the third quarter, according to the latest survey by the IAB Institute for Employment Research. Photographer: Krisztian Bocsi/Bloomberg
© Bloomberg

Manufacturing in the eurozone contracted in May, with an influential gauge indicating that activity remains weak as producers grapple with the intensifying US-China trade war and a slowing global economy.

The single currency area is struggling to recover from the slowdown that began almost a year ago, according to the closely watched eurozone manufacturing purchasing managers’ index, which remained below the crucial 50 level in May.

The flash manufacturing reading, which gives an indication of broader export sentiment, hit a two-month low of 47.7, just below April’s reading of 47.9. Export growth has been under pressure since the middle of 2018, affecting manufacturers across the region, including in Germany, the zone’s economic powerhouse.

Another closely watched poll, the Ifo Institute’s business climate indicator, which reflects business sentiment in Germany, fell to 97.9 in May, the lowest level since 2014. 

“Germany's export-oriented growth model, which specialises in capital goods, continues to be under pressure in the face of cooling global GDP growth, lingering auto sector problems and growing risks for world trade,” said Katharina Utermöhl, economist at Allianz SE. 

However, services activity, which accounts for 73 per cent of the eurozone economy, continued to expand in May, suggesting that low unemployment and better wage growth is propping up domestic demand. In Germany, the May reading of 52.5 helped to put the composite index for the whole economy above the 50 mark and at a two-month high. A separate services reading for France, the region’s second-largest economy, rose to a six-month high.

Some analysts argued that this divergence was not sustainable, however. “If manufacturing production continues to decline for a prolonged period, this will worsen the outlook for the service sector,” said Bert Colijn, economist at ING.

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Nicola Nobile, economist at Oxford Economics, said the sentiment indicators for April and Maymade it “increasingly likely” that her data firm would downgrade their projection for growth in the second quarter from 0.4 per cent to 0.3 per cent.

Policymakers at the European Central Bank watch the PMIs closely because they tend to track GDP. However, a divergence between the hard data and business surveys has emerged since the turn of the year.

Official figures for eurozone and German GDP in the first quarter were both better than expected, with each showing an expansion of 0.4 per cent between the end of 2018 and March.

A detailed breakdown of German GDP data, also published on Thursday, showed that household spending was the main driver of the economic rebound. Construction was also strong, with a 1.9 per cent quarter-on-quarter expansion.

The data breakdown, from the national statistics office DeStatis, indicated that growth was dragged down by changes in inventories after German carmakers delayed the introduction of new emissions standards.

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