Business activity across the UK, Eurozone and US showed diverging trajectories in May, with growth faltering in Europe while the US economy regained momentum despite rising price pressures. The latest flash Purchasing Managers’ Index (PMI) released on 22 May reveal a shifting global picture shaped by differing responses to trade policy, inflation, and sector-specific dynamics. Manufacturing resilience helped steady the Eurozone and US readings, while services dragged on both sides of the Atlantic. In the UK, output remained in contraction, though business sentiment improved.

UK manufacturing slump drags on growth

The UK’s private sector contracted for a second consecutive month in May, according to the S&P Global Flash PMI. The Composite Output Index rose modestly to 49.4 from 48.5 in April, but remained below the 50.0 threshold signalling growth. Services activity edged back into expansion territory at 50.2, but manufacturing output dropped to 44.8, its lowest level in 19 months.

New order volumes declined sharply, with total new work falling at the fastest rate in two and a half years. Manufacturing faced the steepest contraction, reflecting a pullback in non-essential spending and delayed investment decisions amid global uncertainty. Exports also fell, as respondents cited the negative impact of US tariffs and hesitancy among overseas clients. Some firms did report new demand from Asia and Europe, but this was not enough to offset broader weakness.

The labour market mirrored the demand downturn. Private sector employment declined again, led by the steepest job cuts in manufacturing since 2019. Firms cited cost pressures and reduced workloads, with redundancies, hiring freezes and non-replacement of leavers all contributing.

Cost inflation remained elevated but eased from April’s recent peak. Input prices were driven by strong wage growth, higher utility bills and rising shipping costs, although some businesses reported relief from lower fuel prices and favourable exchange rate movements. Output price inflation also moderated, falling to its lowest level in 2025 so far.

Despite the continued contraction, business sentiment improved. Optimism reached a five-month high, recovering from April’s sharp drop. Services firms led the rebound, citing more stable financial conditions and signs of revived spending plans among clients. Manufacturers were less upbeat, with concerns over trade frictions and global uncertainty still weighing on expectations.

“After an ‘awful April’, businesses reported a milder May,” asserted Chris Williamson, Chief Business Economist, S&P Global Market Intelligence. “Business confidence has rebounded from April's recent low, which had seen confidence collapse to a degree not seen since the Truss Budget of 2022, and price pressures have moderated after spiking higher.”

With growth risks persisting and price pressures softening, expectations are mounting that the Bank of England could take a more dovish stance in the months ahead, particularly if labour market weakness continues.

Eurozone services stumble while manufacturing steadies

In the Eurozone, private sector activity dipped back into contraction, ending a four-month run of growth. The HCOB Flash Eurozone Composite PMI Output Index fell to 49.5 in May, down from 50.4 in April and marking a six-month low. The decline was led by the services sector, where output fell to 48.9, the sharpest drop in over a year. Manufacturing, by contrast, saw output grow for a third month running, holding steady at 51.5.

The regional picture was uneven. Activity declined in both Germany and France, extending France’s streak of contraction to nine consecutive months and marking a setback for Germany after four months of growth. The rest of the Eurozone performed better, but even here the pace of expansion slowed to its weakest since January.

New orders declined for a twelfth straight month, with overall new business falling at the fastest pace since December. Service providers bore the brunt, while manufacturing new orders finally stabilised after nearly three years of decline, offering a tentative sign that the worst may be over for industrial output.

Employment held steady in May after two months of modest growth. Manufacturing job losses continued but at a slower rate, while services hiring slowed to a crawl. Backlogs of work fell sharply, suggesting limited pressure on capacity and raising questions over future hiring momentum.

Price trends diverged by sector. Manufacturing saw a steep drop in input costs and the first fall in selling prices in three months. Services, meanwhile, continued to face strong input cost inflation, largely driven by wages. Overall, output price inflation eased to a seven-month low, but service sector stickiness may limit the scope for sharp disinflation.

Manufacturing firms also showed signs of easing caution. Input buying contracted for a 35th consecutive month, but the rate of decline was the slowest since April 2023. Stock reductions slowed, and delivery times continued to improve, albeit modestly.

Confidence remained subdued. The overall business expectations index dropped to its lowest since October 2023. Services sentiment was especially weak, falling to its lowest level since 2012 (excluding pandemic months). Manufacturing optimism, on the other hand, rose to a 27-month high, suggesting diverging outlooks within the private sector.

“The eurozone economy just cannot seem to find its footing,” commented Dr. Cyrus de la Rubia, Chief Economist, Hamburg Commercial Bank. “Since January, the overall PMI has shown only the slightest hint of growth and in May, the private sector actually slipped into contraction.”

The mixed signals present a challenge for the European Central Bank. While weakening services inflation and falling goods prices offer room for rate cuts, wage-driven cost pressures and soft demand may argue for a more gradual approach.

US activity rebounds but price pressures surge

The US economy showed signs of renewed momentum in May, with the S&P Global Flash Composite PMI rising to 52.1 from 50.6 in April. The services sector led the rebound, climbing to 52.3, while manufacturing output also returned to growth at 50.7. Order books improved across both sectors, driven by stronger domestic demand. However, inflationary pressures surged, particularly in response to tariffs.

Manufacturing led the recovery in new orders, posting the fastest rise in 15 months. Service sector demand also picked up, but more modestly. Despite the gains, exports of goods and services continued to decline, weighed down by international trade frictions. Service exports in particular saw their steepest fall since the early pandemic, reflecting a sharp drop in foreign demand for US services.

While output rose, the data signalled an increasingly uneven expansion. Employment fell slightly in both services and manufacturing, as firms responded to rising costs and lingering uncertainty. Labour shortages were also reported, alongside concerns about demand sustainability.

Tariffs were a key driver of the May PMI figures. Manufacturing input inventories surged at a record pace, as firms moved to secure materials ahead of potential further trade disruptions. This pre-emptive buying contributed to a sharp rise in supplier delivery times (the worst since October 2022) and drove a significant buildup in stockpiles.

Price pressures intensified dramatically. Input costs rose at the fastest rate since mid-2022, while output price inflation hit levels last seen during the post-pandemic surge. Manufacturers posted the steepest rise in selling prices since September 2022, and service sector charges jumped to their highest level in over a year. Most of the inflation was directly attributed to tariffs, which drove up costs across supply chains.

Despite inflation concerns, sentiment improved. Business confidence recovered from April’s slump, buoyed by hopes of continued domestic demand and the pause in further tariff hikes. Manufacturing optimism rose on expectations of reshoring and shifting demand toward US-made goods. However, overall sentiment remained slightly below the 2024 average, reflecting persistent policy and cost concerns.

“Business confidence has improved in May from the worrying slump seen in April, with gloom about prospects for the year ahead lifting somewhat thanks largely to the pause on higher rate tariffs,” noted S&P’s Williamson.

The Federal Reserve faces a complicated backdrop. While growth is returning, the sharp rise in prices, particularly those linked to trade frictions, could reignite inflation concerns, limiting room for policy easing in the near term.