By Jonathan Cable
LONDON (Reuters) -Growth in euro zone business activity slowed this month but was still relatively strong despite a cost of living crisis putting a dent in consumer spending power and a shortage of raw materials holding back expansion in manufacturing, a preliminary survey showed.
S&P Global's flash Composite Purchasing Managers' Index (PMI), released on Tuesday and seen as a good guide to overall economic health, fell to 54.9 in May from 55.8 in April, lower than the 55.3 predicted in a Reuters poll.
Any reading above 50 indicates growth.
"The small fall in the euro zone Composite PMI in May suggests that activity is holding up better than we had feared. But the services rebound is likely to run out of steam amid high inflation and the drop in new orders bodes ill for industry," said Jessica Hinds at Capital Economics.
May's services PMI fell to 56.3 from 57.7, well below the 57.5 predicted in the Reuters poll, as sharply rising prices kept some consumers cautious.
Growth in demand for services weakened - the new business sub-index fell to 55.2 from 56.6 - but firms did increase headcount at a faster rate than in April.
A sustained rebound in services helped business activity in Germany, Europe's largest economy, grow although there are signs rising prices, market uncertainty and supply problems are starting to put pressure on demand, a sister survey showed.
In France, the bloc's second biggest economy, growth slowed slightly as inflationary pressures took the shine off a reduction in COVID-19 restrictions.
Momentum in Britain's economy, outside the euro zone and European Union, slowed much more than expected this month, adding to recession worries as inflation pressures ratcheted higher, another survey showed.
A flash PMI covering the euro zone manufacturing industry fell to 54.4 this month from 55.5, worse than the 54.9 predicted in a Reuters poll and its lowest since November 2020. But the output index, which feeds into the composite PMI, rose to 51.2 from 50.7.
Renewed COVID-19 lockdowns in China and Russia's invasion of Ukraine have disrupted supply chains that were only just recovering from the pandemic, sending costs soaring and limiting access to raw materials.
Euro zone manufacturing input and output prices both remained high and factory managers passed on the increasing costs of materials to customers. The output prices index only nudged down from April's record high of 77.3 to 76.0.
Inflation in the euro zone was a record 7.4% in April, official data showed last week, and a recent Reuters poll of economists predicted the European Central Bank would raise its deposit rate in July.[ECILT/EU]
Suggesting more momentum might be lost, the future output index, which monitors expectations for the year ahead, fell to 59.6 from 60.5, its lowest since July 2020.
"The growth outlook is clearly worsening, but the current impact of high inflation and the war (in Ukraine) is not yet contractionary according to the survey," said Bert Colijn at ING.
(Reporting by Jonathan Cable; Editing by Catherine Evans and Susan Fenton)