Global business activity saw notable improvements this month, particularly in parts of Asia and Europe, according to recent surveys. This positive momentum provides central banks with a potential reason to delay interest rate cuts. Initially, borrowing costs were increased post-COVID-19 to combat soaring inflation. Now, the conversation is shifting to when, and by how much, these rates might be reduced.
For politicians, any relief for consumers burdened by debt would be welcome news, especially with upcoming elections in key economies such as India, the United States, and the UK, where Prime Minister Rishi Sunak recently called for a national election on July 4. According to an April Reuters poll of economists, the global economy is expected to maintain its solid growth trajectory through the rest of the year and into 2025, contrary to earlier forecasts of a slowdown.
“Central banks will start cutting rates but will likely reassess the situation by the end of the year or early next year, realizing that inflation is more persistent than anticipated,” said Vincent Stamer of Commerzbank. “Thus, the rate-cutting cycle might not be as extensive as initially thought.”
European Economic Performance
In Europe, business activity reached its highest pace in a year, driven by strong demand for services, although the manufacturing sector also showed signs of recovery. The HCOB preliminary composite Purchasing Managers’ Index (PMI), compiled by S&P Global, rose to 52.3 in May from April’s 51.7, exceeding expectations of a rise to 52.0. This marks the third consecutive month the PMI has been above the 50 threshold, indicating growth.
Overall, prices charged increased at their slowest rate since November, and the output prices index fell to 52.5 from 53.7. This may prompt the European Central Bank (ECB) to consider easing monetary policy when they meet in two weeks. “The PMIs for May suggest that the eurozone economy continued to expand in Q2 while price pressures eased but remained high in the services sector,” noted Franziska Palmas of Capital Economics. “The ECB is still likely to cut rates in June, but further cuts may proceed more slowly if the economy remains strong.”
Germany’s PMI stayed above 50 for the second consecutive month, driven by robust services activity in the region’s largest economy. Conversely, France saw an unexpected contraction in its private sector activity in May, with both services and manufacturing sectors reporting declines.
UK and Asian Markets
In the UK, business activity slowed significantly in May, more than any economist polled by Reuters had predicted, posing an early challenge to Sunak’s election campaign.
In contrast, India’s business activity expanded robustly in May, led by the services sector. The PMI indicated record export growth and the fastest rate of job additions in nearly 18 years.
Japan’s factory activity showed signs of recovery, creeping into expansion for the first time in a year, according to the au Jibun Bank flash PMI. Meanwhile, Australia’s composite PMI remained solid despite a dip caused by a manufacturing downturn and a slightly weaker services performance.
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