Private sector activity across the eurozone remained virtually unchanged in June, with the latest purchasing managers’ index (PMI) data pointing to stagnation in both the services and manufacturing sectors, casting a shadow over the region’s economic recovery.
The preliminary composite business activity index for the eurozone in June remained at 50.2 points, unchanged from May and just above the 50-point threshold that separates growth from contraction. The figure was slightly below market expectations of 50.5.
The business activity index in the services sector rose as expected to 50 from 49.7, while the business activity index in the manufacturing sector remained unchanged at 49.4, falling short of forecasts of a rise to 49.8.
Weak growth despite easing financial conditions
“The eurozone economy is struggling to gain momentum,” Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said. “Growth has been minimal for six months, activity in the services sector has stagnated and manufacturing output has grown only moderately.”
Business activity remains subdued despite the European Central Bank’s (ECB) more accommodative monetary policy, which saw it cut its deposit rate by another 25 basis points to 2.00%.
Regional differences are increasing
Regional differences are becoming increasingly apparent. Germany, the European Union’s largest economy, showed modest growth. The composite business activity index rose to 50.4 in June from 48.5 in May, helped by demand in the manufacturing sector, which saw the fastest growth in new orders in three years.
“There is a high chance that Germany will finally be able to break out of the disappointing slowdown pattern it has been stuck in for the past two years,” de la Rubia said, citing positive production momentum and support from stimulative fiscal policy.
France, on the other hand, continued its downward trajectory. The composite business activity index fell to 48.5 in June from 49.3 in May, marking the tenth consecutive monthly decline.
Both the manufacturing and service sectors saw a decline, with companies citing low domestic demand, increased international competition and uncertainty in global trade. Total sales declined for the thirteenth consecutive month in June, with the rate of decline accelerating slightly compared to May. The sharper decline was driven by the sharpest contraction in manufacturing orders since February.
“The outlook is certainly cloudy,” Jonas Feldhusen, junior economist at HCOB, said. “The question is whether this month’s decline in manufacturing output is just a temporary dip or already marks the end of the upward trend,” he also added.
Regional conflicts’ impact on the eurozone
The latest PMI data presents a mixed picture for the ECB. While inflationary pressures in the goods sector continue to ease, persistent price increases in services and renewed geopolitical tensions could prevent further monetary policy easing in the near term.
Many markets expect the ECB to keep its base interest rate unchanged at 2% at its next meeting on July 23-24.
However, the overall economic situation remains fragile, as the US strikes on Iran over the weekend have heightened concerns about a protracted conflict in the Middle East. The unrest could trigger a new surge in oil prices, especially given that nearly 20% of global crude oil supplies pass through the Strait of Hormuz.
The uncertainty is compounded by the fact that the 90-day mutual tariff truce initiated by US President Donald Trump expires on July 9. Negotiations are still ongoing, and Europe has less and less time to conclude a trade agreement and avoid a new wave of destructive transatlantic tariffs.
