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Improved business activity casts doubt over rate cuts

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WASHINGTON/LONDON : Businesses across the globe broadly enjoyed an improved performance this month with activity picking up in the United States and across parts of Asia and Europe, surveys showed on Thursday, giving central banks room to potentially defer cutting interest rates.

Borrowing costs were raised following the COVID-19 pandemic to combat rampant inflation but talk has now turned to how soon – and by how much – they will fall, particularly in countries where voters go to the polls this year.

Elections are currently being held in India, the United States goes to the polls in November, and on Wednesday British Prime Minister Rishi Sunak called a national election for July 4.

The global economy is likely to carry its solid momentum for the rest of the year and into 2025, defying earlier expectations of a slowdown, according to an April Reuters poll of economists who said stronger growth than forecast was more likely than weakness.

U.S. business activity accelerated to the highest level in just over two years in May, suggesting that economic growth picked up half-way through the second quarter.

S&P Global said on Thursday that its flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, jumped to 54.4 this month. That was the highest level since April 2022 and followed a final reading of 51.3 in April.

A reading above 50 indicates expansion in the private sector. Economists polled by Reuters had forecast the index little changed at 51.1. The increase was driven by the services sector, with the flash PMI rising to 54.8 from 51.3 in April. The manufacturing flash PMI inched up to 50.9 from 50.0.

However, manufacturers reported a surge in prices for a range of inputs, suggesting that goods inflation could pick up in the months ahead, in a worrying sign for the Federal Reserve as it waits for more confidence inflation has resumed a downward path before commencing rate cuts.

“The main inflationary impetus is now coming from manufacturing rather than services, meaning rates of inflation for costs and selling prices are now somewhat elevated by pre-pandemic standards in both sectors to suggest that the final mile down to the Federal Reserve’s 2% target still seems elusive,” said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Inflation Easing in Europe

In Europe, activity expanded at its fastest pace in a year this month, supported by buoyant demand for services, while the manufacturing sector showed signs of approaching a recovery.

HCOB’s preliminary composite Purchasing Managers’ Index (PMI), also compiled by S&P Global, climbed to 52.3 this month from April’s 51.7, beating expectations in a Reuters poll for a more modest lift to 52.0. May marked its third month above the 50 level.

Overall prices charged rose at their slowest pace since November and the output prices index dropped to 52.5 from 53.7, potentially opening the door to policy easing from the European Central Bank.

ECB policymakers are widely expected to reduce interest rates when they meet in two weeks.

“The PMIs for May suggest that the euro zone economy continued to expand in Q2 while price pressures eased but remained high in the services sector,” said Franziska Palmas at Capital Economics.

“The ECB is still very likely to go ahead with a rate cut in June, but if the economy continues to hold up well cuts further ahead may be slower than we had anticipated.”

Germany’s headline PMI was above 50 for a second consecutive month, driven by strong services activity in Europe’s largest economy.

But in France, the bloc’s second-biggest economy, the private sector unexpectedly shrank this month after expanding in April with the services industry joining manufacturing in reporting a contraction in activity.

Growth across British businesses cooled noticeably in May and by more than any economist polled by Reuters had predicted, its PMI showed, in an early blow for Sunak’s election campaign.

Business activity in India expanded robustly in May, helped by the dominant services industry, according to its PMI that also showed exports rising at a record pace and the sharpest job addition rate in nearly 18 years.

Japan’s factory activity crept into expansion for the first time in a year this month, the au Jibun Bank flash PMI showed, as manufacturing gathered pace after months of weakness.

While the Australian composite PMI remained solid, it did dip due to a continuing manufacturing downturn and a slightly weaker services performance.

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