French business activity deteriorated sharply in May, with a closely watched survey showing the euro zone’s second-largest economy contracting at the fastest pace in more than five years as services demand weakened and manufacturing lost momentum.

The flash composite Purchasing Managers’ Index for France, compiled by S&P Global, fell to 43.5 in May from 47.6 in April, according to data reported by Reuters. The reading was well below the 50 mark that separates expansion from contraction and signaled the deepest decline in private-sector output since late 2020, when the economy was still being disrupted by pandemic restrictions.

The services sector, which accounts for the bulk of French economic activity, drove the downturn. The flash services PMI dropped to 42.9 in May from 46.5 in April, its lowest level in 66 months and well below market expectations for a more limited decline. Manufacturing also slipped back into contraction, with the flash manufacturing PMI falling to 48.9 from 52.8, reversing a recent improvement in factory sentiment.

The figures marked a significant setback for France after months of weak but comparatively contained readings. They suggest that the slowdown is no longer confined to isolated sectors and may now be broad enough to threaten quarterly growth. In PMI surveys, levels below 50 indicate that more companies are reporting a fall in activity than a rise. A reading in the low 40s is typically associated with a material contraction in output.

The deterioration is important because France entered the second quarter with limited growth momentum, tight fiscal space and fragile confidence among households and businesses. A deepening services downturn raises the risk that domestic demand, rather than external trade alone, is becoming the main drag on activity. That would make the weakness harder to offset through inventory rebuilding or temporary export gains.

New business fell sharply in May, according to the PMI survey, indicating that companies were not merely working through delayed orders but facing a genuine demand shortfall. The services sector was particularly exposed, with clients delaying spending decisions amid uncertainty over costs, financing conditions and the broader economic outlook. The decline in new orders points to continued pressure on output in coming months unless demand stabilizes quickly.

The survey also showed renewed pressure on manufacturing. Earlier in the year, French factories had benefited from pockets of stronger production and precautionary purchasing, partly linked to supply-chain uncertainty and defense-related demand. May’s fall back below 50 suggests that those supports were not strong enough to prevent the sector from weakening as order books softened and input costs remained elevated.

For the broader French economy, the services slump is the more consequential signal. France’s expansion is heavily dependent on domestic consumption, tourism, transport, business services, financial activity and public-facing sectors. When services activity contracts sharply, the weakness can feed quickly into employment, wage growth, tax receipts and corporate margins. The PMI data therefore raise the probability that second-quarter gross domestic product could stagnate or decline.

S&P Global economists linked the worsening outlook to a combination of falling demand, high uncertainty and renewed cost pressures. Energy and fuel costs have remained an important source of concern for companies, especially amid geopolitical tensions that have affected commodity markets and transport costs. Businesses reported that input prices were rising at a faster pace, adding pressure to margins at a time when sales volumes were falling.

That combination is particularly difficult for policymakers. A normal downturn driven primarily by weak demand might support the case for easier monetary policy. But a downturn accompanied by renewed cost inflation leaves the European Central Bank with less room to respond, especially if companies pass higher costs through to consumers. The PMI data therefore add to the debate over whether the euro zone faces a conventional growth slowdown or a more troublesome stagflationary episode.

The French data also arrived alongside weak readings elsewhere in the currency bloc. Reuters reported that euro zone business activity contracted in May at the fastest pace in more than two years, with the region’s composite PMI falling to 47.5. Germany’s private sector also remained in contraction, with its composite PMI at 48.6. Together, the national and regional surveys suggest that weakness is spreading across the bloc rather than being limited to France.

France’s performance is nonetheless notable because of the scale of the deterioration. The services PMI at 42.9 represented a much sharper decline than economists had expected. The composite reading of 43.5 also moved France further below the euro zone aggregate, underscoring that domestic conditions in France are deteriorating faster than the regional average. That gap could become important for fiscal and political debates in Paris if tax revenues weaken or unemployment starts to rise.

The PMI survey is not a direct measure of GDP, but it is closely monitored because it provides one of the earliest monthly signals of business conditions. Financial markets use flash PMI readings to adjust expectations for growth, interest rates and corporate earnings before official output data are released. A sustained composite reading below 50 would be consistent with a contracting private sector and could force economists to revise down their forecasts for French growth.

The weakness comes as France already faces pressure over its public finances. A slowdown in activity would make deficit reduction harder by restraining tax receipts and increasing demand for public support. The French government has been trying to balance fiscal consolidation with measures to preserve purchasing power and competitiveness. A sharper economic downturn would narrow that policy space and could intensify scrutiny from investors and European institutions.

For French companies, the May PMI points to a difficult earnings environment. Services firms face weaker demand at the same time as labor, energy and supplier costs remain high. Manufacturers face the additional challenge of uncertain external demand and volatile input prices. If businesses are unable to pass on higher costs, profit margins could compress. If they do pass on costs, demand could weaken further, especially among price-sensitive consumers and smaller corporate clients.

The labor-market implications will also be closely watched. PMI surveys often provide early indications of hiring intentions. A deep fall in new orders and business activity usually leads companies to slow recruitment, reduce temporary staffing or cut hours before official employment statistics show a turn. France’s labor market has been an important stabilizer for household income, but persistent private-sector contraction would increase the risk of a broader employment slowdown.

The data may also influence expectations for the European Central Bank’s policy path. The ECB’s mandate is focused on price stability, but policymakers also monitor growth conditions closely because a weakening economy can reduce inflation over time. If France and the wider euro zone continue to contract, markets may expect a more dovish policy stance. However, the inflation signals embedded in the PMI, especially rising input prices, could limit how quickly the central bank can shift toward support.

Investors are likely to interpret the French PMI as negative for cyclically sensitive sectors, including banks, consumer discretionary companies, travel, commercial property and industrials exposed to domestic orders. Banks may face slower loan demand and rising credit risk if the downturn persists. Consumer-facing companies could see weaker foot traffic and lower pricing power. Industrial firms may face renewed pressure on capacity utilization if manufacturing orders continue to decline.

The euro and European bond markets could also respond to the data, depending on how traders weigh growth risks against inflation pressures. Weak activity readings typically place downward pressure on yields by increasing expectations of monetary easing. But if investors conclude that inflation is becoming sticky because of energy costs, sovereign bond markets may demand additional risk compensation, particularly from countries with high debt burdens and limited fiscal room.

The PMI report also carries political significance. France has experienced periodic tension over living costs, public spending and economic reform. A downturn centered on services could affect small businesses, hospitality, transport and professional services—sectors with high visibility in local communities. If activity weakens further, the government could face pressure to provide support even as it seeks to keep fiscal policy under control.

One of the main questions is whether the May slump represents a temporary shock or the start of a deeper downturn. Flash PMI readings can be volatile, and one month of data does not determine the trajectory of the economy. However, the scale of the decline, the weakness in new orders and the simultaneous downturn in both services and manufacturing make the report difficult to dismiss as statistical noise.

April’s data had already shown France’s services sector contracting, with the final services PMI at 46.5 and the composite PMI at 47.6. May’s flash figures therefore extend, rather than reverse, the earlier deterioration. The move from moderate contraction to a much deeper downturn suggests that uncertainty and cost pressures intensified during the month and that clients became more cautious about discretionary spending and investment.

The external backdrop adds to the challenge. France is closely tied to the wider euro zone economy, and weaker demand in Germany, Italy, Spain or other trading partners can feed through to French manufacturers and business services. At the same time, global supply-chain disruptions and energy-market volatility can raise costs for companies even when domestic demand is weakening. That leaves firms exposed to both demand and supply shocks.

For households, the PMI data matter because a services-led downturn can affect employment and confidence more directly than a manufacturing slowdown alone. Consumers may become more cautious if job security weakens or if businesses reduce hiring. That caution can then reinforce the services downturn through lower spending on travel, restaurants, retail, leisure and other discretionary categories. A negative feedback loop between confidence and consumption is one of the key recession risks now highlighted by the survey.

France’s official GDP figures will ultimately determine whether the economy enters a technical recession, commonly defined as two consecutive quarters of contraction. But the May PMI makes clear that private-sector momentum has weakened meaningfully. Unless June data show a rebound, the second quarter could prove much softer than policymakers and investors had expected at the start of the spring.

The immediate market significance is that France is no longer showing only a shallow private-sector slowdown. The May flash PMI depicts a broad and accelerated contraction, with services at the center of the deterioration. That changes the tone of the macro debate from weak growth to recession risk, while leaving the European Central Bank and French fiscal authorities facing the more complex problem of slowing output alongside persistent cost pressure.