Eurozone PMI unexpectedly rose to a five-month high in July, with German manufacturing rebounding and French services recovering, but the recovery remains threatened by oil prices.

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Eurozone economic activity saw significant improvement in July, with the composite PMI returning to expansion territory and far exceeding market expectations, as signs of recovery appeared in both the German and French economies. However, as US-Iran tensions escalate again, oil and gas prices are under renewed pressure, and risks from inflation and supply chains may weaken this round of recovery.

Latest data show that S&P Global's Eurozone July composite purchasing managers’ index (PMI) rose to 51.9, breaking above the 50 threshold and returning to expansion territory, far higher than Bloomberg’s economist survey median forecast of 50.2, and exceeded almost all surveyed economists’ expectations.

Both Germany and France performed better than expected. Germany’s composite PMI rose from 49.5 to 51.2, ending three consecutive months of contraction; France’s composite PMI rebounded from 47.2 to 49.6, hitting its highest level since the outbreak of Middle East conflicts.

But markets worry that as US-Iran military conflict escalates, international oil and gas prices may push inflationary pressures higher again, hitting business and consumer confidence. The European Central Bank kept interest rates unchanged on Thursday, but according to reports citing insiders, officials remain inclined to discuss further rate hikes in September.

German and French recovery drives Eurozone back into expansion

Eurozone’s composite PMI in July crossed the 50 threshold for the first time since March, with overall economic activity returning to levels seen before the outbreak of Middle East conflicts.

Germany was the main driving force. Germany’s composite PMI rose to 51.2, and the manufacturing sub-index climbed to 52.2, hitting a four-month high; services improved somewhat, but remained in contraction territory. Phil Smith, economic analyst at S&P Global Market Intelligence, said the German economy showed positive performance at the start of Q3, but ongoing regional tensions and rising global energy prices mean economic recovery remains uncertain.

The French economy also improved. France’s July composite PMI rose to 49.6, the highest since February, largely driven by services (services PMI rose to 49.8, strongest since last December); manufacturing is close to the threshold but remains relatively weak.

Joe Hayes, Senior Chief Economist at S&P Global Market Intelligence, said that considering renewed pressure in oil and gas markets, expectations for sustained French recovery may be overly optimistic.

Inflationary pressures ease, but energy risks flare up again

The July PMI survey shows that cost pressures in the Eurozone eased significantly, reaching the lowest level since the Middle East conflict, with slower rises for both goods and services sales prices. Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, stated that falling cost pressure will “ease the urgency for the ECB to further hike rates.”

As the first G7 central bank to hike rates in response to Middle East conflict, the ECB opted to stand pat this Thursday. Bloomberg Senior Economist David Powell noted that PMI data shows Eurozone economy improved at the start of Q3 amid falling commodity prices, but a rebound in oil and gas prices could disrupt this trend. He stated that economic recovery can only be more sustainable if energy costs fall in the second half of this year.

Structural pressures remain, recovery outlook for Germany and France under strain

Despite short-term data improvement, the Eurozone’s two largest economies still face structural challenges, and the foundation of recovery is not yet solid.

Both the German government and Bundesbank have downgraded the forecast for this year’s economic growth to 0.5%, to rely mainly on public infrastructure and defense spending. Chancellor Merz recently launched a series of measures to boost investor confidence, and the June Ifo Business Climate Index rebounded, but whether the proposed “Year of Growth” by 2026 can be realized depends on developments in geopolitical situations.

France’s economy continues to be affected by high oil prices and weak consumer demand. As an important driver of growth, consumer spending keeps contracting, and consumer confidence indicators have fallen significantly. The government has revised its economic growth forecast for 2026 from 0.9% down to 0.7%, and admitted it will be difficult to meet this year’s budget deficit reduction target.

Meanwhile, as the presidential election approaches next year, strained relations between the presidential palace and parliament and repeated threats of cabinet collapse have heightened political uncertainty, further dragging on business and consumer confidence.

S&P Global Market Intelligence Chief Economist Williamson summarized, July saw “a welcome recovery” in Eurozone economic activity, but “the turbulent geopolitical environment means whether this good news can continue remains to be seen.” With oil prices rising and shipping risks increasing, if inflationary pressures mount again or energy supply is disrupted, the Eurozone economy may again come under strain.

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