In May 2025, the eurozone's business activity experienced an unexpected contraction, marking the first decline in five months. The composite Purchasing Managers' Index (PMI), compiled by S&P Global and Hamburg Commercial Bank (HCOB), fell to 49.5 from April's 50.4, slipping below the 50 threshold that separates growth from contraction. source

This downturn was primarily driven by a sharper decline in the services sector, with its PMI dropping to 48.9, the lowest level since January 2024. In contrast, the manufacturing sector showed signs of stabilization, with its PMI rising to 49.4, though it remained in contraction territory. source

Country-Specific Performance:

• Germany: Germany experienced its first contraction in overall business activity for the year, with the composite PMI dropping to 48.6 from 50.1 in April. The services sector index declined significantly to 47.2, its lowest in 30 months, due to weakening demand and customer uncertainty. Manufacturing showed slight improvement, with its index increasing to 48.8 from 48.4. source

• France: France's composite PMI slid to 47.3 in April from 48, indicating continued contraction. The services sector bore the brunt of the decline, with a PMI of 46.8, while manufacturing remained weak but stabilized somewhat at 48.2. source

New Orders and Pricing:

New orders in the services sector continued to decline for the fourth consecutive month, whereas manufacturing orders stabilized after a prolonged period of decline. Both input and output prices reflected a general decrease, albeit with sectoral differences. source

Business Confidence and Employment:

Business confidence reached a 19-month low, and employment levels remained stable. source

Economic Outlook:

The unexpected contraction raises concerns about the eurozone's economic recovery, especially given the services sector's significant contribution to GDP. The European Central Bank (ECB) has implemented multiple interest rate cuts, with markets anticipating another reduction to 2.00% in early June. Improved manufacturing performance, especially in Germany and France, and lower oil prices contribute to cautious optimism despite the overall economic slowdown. source

Market Reactions:

European stocks slid as bond yields rose, reflecting investor concerns over the economic slowdown indicated by the PMI data. source

The eurozone's unexpected contraction in business activity, driven by a significant downturn in the services sector, underscores the fragility of the region's economic recovery. While manufacturing shows signs of stabilization, the overall outlook remains cautious, with policymakers and investors closely monitoring upcoming economic indicators and policy decisions.