'Stuttering' eurozone growth keeps pressure on ECB to act

"All in all, there is absolutely nothing in the latest data to stop Mr Draghi and colleagues from following through on last month’s very strong hints of further policy action," said Jonathan Loynes, chief European economist at Capital Economics.

European shares fell and the euro slipped against the pound after the data confirmed a slowdown in the eurozone's economic recovery in the first quarter.

The Markit Eurozone PMI Composite Output Index came in at 53.5 for May, down only slightly from a near three-year high in April of 54 – the eleventh month of growth in output at manufacturers and service companies. A figure above 50 denotes expansion.

Chris Williamson, chief economist at Markit, said: “Despite falling, the Eurozone PMI remains firmly in expansion territory and consistent with GDP rising by a reasonable 0.4pc in the second quarter."

However, he cautioned: "Although the eurozone is enjoying its best performance for three years, this is an uneven, stuttering and lacklustre recovery."

^{The euro fell against the pound after the GDP data. Graph: BLOOMBERG}

The gap between the performances of the two largest economies remained wide last month, Markit said. German output growth was strong with rising new orders at manufacturers and a service companies, while France slipped back into contraction.

“France remains a major drag on the region’s revival," said Mr Williamson, adding that the survey data suggested the French economy had stagnated in the second quarter and was a possibility of a renewed downturn in French GDP if business conditions continue.

“Germany, in contrast, remains the key driver of the region’s recovery," he said.

The eurozone service sector PMI expanded to 53.2 in May, up slightly from 53.1 in April, the tenth month of growth in a row. PMI figures on Monday revealed growth in eurozone manufacturing is slowing, with Germany’s growth cooling and France slipping into contraction.

Analysts expect the ECB to introduce a negative deposit rate at its meeting on Thursday, which effectively means the central bank would charge lenders to hold money with it overnight. Such a measure has never been introduced by a major central bank, although Sweden and Denmark have set negative rates on reserves.

The ECB has held its key interest rates steady at their current all-time lows since November, repeatedly promising to act if necessary to avert a bout of destructive deflation in the 18 countries that share the euro.

ECB President Mario Draghi has hinted at the possibility of such a move, saying the central bank's decision-making governing council was "dissatisfied" with the current path of inflation and was "not prepared to accept it as a fact of nature".

He is expected to unveil a package of measures designed to boost eurozone lending and stimulate growth on Thursday.

Mr Draghi has resisted calls to follow the Bank of England and US Federal Reserve which have embarked on massive quantitative easing (QE) in the form of bond purchases to drive recovery.

Mr Loynes said: "We still expect a cut in the refi rate and the imposition of a negative deposit rate, alongside measures to boost bank lending. But the bazooka of large-scale QE will also be needed if deflation risks are to be tackled head on."

Germany and the United Kingdom recorded the highest GDP in the European Union, with their economies expanding 0.8pc respectively compared with the previous quarter. The largest decreased were registered in The Netherlands (-1.4pc), Estonia (-1.2pc), Cyprus and Portugal (both -0.7%). French GDP was zero.

The gap between the performances of the two largest economies remained wide last month. German output growth was strong with rising new orders at manufacturers and a service companies, while France slipped back into contraction.

“France remains a major drag on the region’s revival," said Mr Williamson.

He said the survey data suggested the French economy had stagnated in the second quarter and was a possibility of a renewed downturn in French GDP if business conditions continue.

“Germany, in contrast, remains the key driver of the region’s recovery," he said.

The eurozone service sector PMI expanded to 53.2 in May, up slightly from 53.1 in April, the tenth month of growth in a row. PMI figures on Monday revealed growth in eurozone manufacturing is slowing, with Germany’s growth cooling and France slipping into contraction.

Wednesday PMI data comes a day after figures showed eurozone inflation fell to worse-than-expected 0.5pc in May, increasing pressure on the European Central Bank to act to support growth when it meets on Thursday.

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