France’s May final services PMI was adjusted to 48.9 from an original 47.4. The last reading was 47.3. The composite PMI also increased to 49.3 from a preliminary 48.0, compared to the previous data of 47.8. The higher PMI indicates a slower decline in business activity. The drop in new orders and employment was less severe than in previous months, suggesting the private sector might soon exit this downturn. However, the composite PMI remains below the growth threshold.

Current Market Conditions

Market conditions are still tight as both domestic and foreign demand continues to decline, though at a slower rate. There are slight signs of increasing demand, but optimism for future improvements has faded, causing concern among service providers due to ongoing uncertainties. In May, profit margins in the service sector fell due to rising input costs, mainly due to wage pressures. At the same time, output prices decreased, indicating that companies struggled to pass these increased costs onto customers. This situation may lead the European Central Bank (ECB) to consider lowering rates further, with two more cuts expected this year. The upward revision in the French services and composite PMIs shows a small change in sentiment, indicating that the business environment remains tough but isn’t getting worse as quickly. Even though a figure below 50 indicates contraction, the narrowing gap suggests that this contraction is easing. The data indicates that businesses are not expanding yet, but the pace of decline has softened somewhat.

Potential Turning Point

When new orders and employment slow their decline, it often means we’re approaching a turning point. Morale may still be cautious, but signs of stabilization could be emerging. However, since the figures are still below the 50-mark, the risk of renewed weakness remains. These changes in indicators alone may not look promising, but they suggest that the downward trend is not worsening. We’ve noticed that pricing power in services is shrinking. Input costs, especially labor-related, continue to rise, while output prices are falling. This means firms struggle to pass higher costs to their customers. This squeeze on margins is an important sign, especially when considering future monetary policy. The mismatch between costs and prices might justify the ECB’s potential easing, especially if inflation pressures, like wage increases, persist. Realistically, if output prices keep showing weakness and wage inflation stays stubborn, a push for lower rates is more likely in the latter part of the year. Despite some providers hoping for better demand, the general feedback remains weak. With expectations for the future subdued and confidence not fully returning, we’re viewing these revisions as somewhat positive but not defining. The trends still carry significant uncertainty, and there’s little indication of a strong rebound soon. What’s crucial now is how activity performs in June and whether these contractions ease into neutral territory. We’re closely monitoring pricing strategies, as this will indicate how companies manage cost pressures without making deeper cuts to staff or investments. If margins continue to decline, monetary support may become more likely—not immediately, but in the coming quarters. Create your live VT Markets account and start trading now.

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