Eurozone economy “stops declining” in June: Composite PMI returns to 50, German data unexpectedly “rescues”

Eurozone business activity in June performed better than preliminary estimates. The Composite PMI rose to 50.0, returning above the expansion threshold and ending two consecutive months of contraction. Meanwhile, cost pressures in the service sector cooled at near-record speed, adding uncertainty to the ECB’s future interest rate path. According to data released by S&P Global on July 3, the final Eurozone Composite PMI for June rose from 48.5 in May to 50.0, higher than the preliminary estimate of 49.5, indicating that economic activity has stabilized and rebounded after a brief contraction. Notably, a significant upward revision in German data was the main driver of the overall improvement: Germany’s final Composite PMI for June rose to 49.5, substantially higher than both the preliminary estimate and market expectations (previously forecasted around the 48.5–49.0 range). The contraction was much less than expected and was close to the expansion threshold. S&P Global Chief Business Economist Chris Williamson noted that easing downward pressure in the service sector, combined with continued manufacturing expansion, has stabilised the Eurozone economy after two consecutive months of output decline. The rebound in data comes as internal policy disagreements within the European Central Bank intensify. Although the ECB implemented its first interest rate hike since 2023 in June, several officials signaled during this week’s annual conference in Portugal that last month’s action may have reached sufficiently restrictive levels. The rapid easing of cost pressures further dampened market expectations for future rate hikes, making the policy outlook increasingly complex. Composite PMI returns to expansion territory, Germany’s figures revised up significantly The final Eurozone Composite PMI for June stood at 50.0, revised up by 0.5 percentage points from the preliminary 49.5, and higher than May’s 48.5, marking the first return to expansion since March. Manufacturing output recovery partially offset the still contractionary but marginally improving status in the service sector. Germany was the main source of the upward revision. Its final Composite PMI for June rose to 49.5, and its final Services PMI rose to 48.6, significantly up from the preliminary 46.8—highs for the current downward cycle. Although still in contraction, the scale of contraction has markedly narrowed. S&P Global’s Co-Director of Economics, Phil Smith, pointed out that Germany’s service sector remains dragged by geopolitical and external uncertainties, with new orders declining for several straight months and overseas demand staying weak. Service sector cost pressures cool markedly, inflation eases The most notable change in the data is on the cost side. Service sector input cost inflation in the Eurozone slowed in June for the first time since October last year, hitting a four-month low. The decrease was the second-highest since records began in 1998, second only to the early pandemic period in 2020. Price increases passed to end customers by the service sector also narrowed, indicating an overall retreat in price pressures. Improvements in costs are related to the pullback in energy prices. Markets previously focused on the impact of Middle East tensions on oil prices, but recent declines in oil prices have alleviated imported inflation pressures. Nevertheless, overall Eurozone inflation in June remained at 2.8%, exceeding the ECB’s 2% target. Demand-side weakness persists, policy path disagreement grows Despite easing cost pressures, the demand side remains under strain. Eurozone new orders in the service sector continued to decline in June, overseas demand contracted for several months, and backlogged orders were digested faster, indicating weak overall demand momentum. Employment showed differentiation. Service sector employment in Germany fell for the sixth consecutive month, though at a slower pace; overall Eurozone service employment recorded the fastest growth since the beginning of the year, rising slightly from May. Meanwhile, business confidence improved to the highest level since February, reflecting improved medium-term expectations, though near-term demand remains weak. Against the backdrop of intertwined inflation and growth signals, internal disagreements over the ECB’s future policy path have increased. The June rate hike was seen as a proactive move to counter inflation risks triggered by geopolitical conflicts, but some officials have hinted recently at a possible pause. The rapid decline in service sector cost pressures has provided more support for voices advocating a pause in rate hikes. The market widely believes the ECB may shift to a data-dependent mode, deciding whether to further tighten policy after assessing the sustained downward trend in price pressures. Risk warnings and disclaimer The market has risks; investment needs caution. This article does not constitute personal investment advice and does not take into account individual users’ specific investment objectives, financial circumstances, or needs. Users should consider whether any opinions, viewpoints, or conclusions in the article are suitable for their particular situation. Any investment made based on this article is at the user's own responsibility.