French business activity hits lowest level in more than five years as Oil shock widens

• The French Composite PMI falls to a more than five-year low in May, suggesting a steep contraction in the Eurozone's second-largest economy.
• The decline in French private-sector activity is attributed to high energy prices.
• The Euro holds above 1.1600 despite the dim PMI data as markets hold onto renewed optimism about a US-Iran agreement.

France's private-sector activity took a deep hit in May, according to preliminary data from S&P Global, suggesting that the surge in Oil prices has hit households and businesses hard in the Eurozone's second-largest economy.

The French Composite PMI, which gauges activity in both the manufacturing and services sectors, fell to 43.5 in May, the lowest level since November 2020. The reading misses economists' forecasts, who expected the PMI to be broadly unchanged from April's 47.6.

By falling deeper below the 50 threshold, the reading suggests a steep contraction in the French economy. "May's flash PMI survey for France provides a dire set of numbers," said Joe Hayes, Principal Economist at S&P Global Market Intelligence.

The steep decline in economic activity is largely attributed to the Oil shock stemming from the Iran war. Both factories and service-sector firms reported that higher energy costs are the reason behind lower output.

"The concern is that a broader uplift in the economy's overall price level raises the risk of further demand destruction," Hayes said. "Alarmingly, we saw private sector new orders plummet in May, giving us a clear indication that this shock has materially lifted recession risks for the eurozone's second-largest economy."

On the broader Eurozone, PMI data showed that the region's economy also contracted in May, albeit at a less steep pace than France's.

Market reaction

A decent recovery has been observed in the Euro (EUR) during the Eurozone flash PMI data release. However, the impact appears to be related to the sharp correction in the US Dollar (USD) amid rising hopes of a potential deal between the United States and Iran. At press time, EUR/USD bounces back to near 1.1630 from the intraday low of 1.1594.