Activity in Sweden's manufacturing slumped in May, hitting its lowest level in three years and indicating that higher rates and a cost of living crisis are finally catching up with the economy, data compilers Silf and Swedbank said on Thursday.

The purchasing managers index dropped to 40.6 points from a downwardly revised 44.9 points the previous month.

It was the 10th month in a row the index has been below the 50 point level which divides growth from contraction in the sector. The sub-index new orders was the biggest contributor to the fall.

"It was a surprisingly broad fall and shows that the business cycle continues to weaken, which we can also see in the countries around us, not least in the euro zone," Swedbank economist Jorgen Kennemar said.

Sweden's economy started the year strongly with gross domestic product

expanding 0.6% in the first quarter after shrinking at the end of 2022.

But economists have expected the surge in inflation and a central bank interest rate that has jumped to 3.5% from 0% in just over a year to eventually drag down activity.

Retail-oriented businesses have already been hit, but up to now exporters have been riding high, thanks in part to the weak Swedish crown.

German business sentiment also fell in May with the economy, which entered a technical recession in the first quarter, likely to be slow to recover. (Reporting by Simon Johnson, editing by Essi Lehto and Terje Solsvik)