Euro zone activity picks up pace as services rebound, PMI hits 11-month high

The euro zone’s economic engine is starting to hum again, albeit cautiously. In July, business activity across the 20-member bloc accelerated to its fastest pace in nearly a year, driven by a stronger services sector and tentative signs of life in manufacturing. According to flash survey data published by S&P Global and Hamburg Commercial Bank (HCOB), the region’s composite Purchasing Managers’ Index (PMI) rose to 51.0, an 11-month high, up from 50.6 in June. The reading beat Reuters’ poll forecast of 50.8 and marked a second straight month of growth.

Services sector leads the recovery

The July rebound was primarily powered by the services sector. The services PMI rose to 51.2, from 50.5 in June, surpassing analyst expectations of 50.7. “The euro zone economy appears to be gradually regaining momentum,” said Cyrus de la Rubia, Chief Economist at HCOB, in remarks quoted by Reuters. “The recession in the manufacturing sector is coming to an end, and growth in the services sector accelerated slightly in July.”

The composite new business index, a proxy for demand, climbed to 50.0, its highest in over a year, indicating stabilisation after months of contraction.

Factories still in contraction, but improving

While still below the growth threshold, manufacturing activity showed tentative recovery. The manufacturing PMI improved to 49.8 in July from 49.5 in June, slightly better than expected.

However, factory output edged down to 50.7 from 50.8, and the increase in activity was largely due to the completion of backlogged orders. The backlogs of work index rose to 49.0 from 47.1, its best level in nearly three years, indicating that the drag on manufacturing may be easing.

Inflation pressures ease across services

Input costs in the services sector cooled sharply. The services input price index fell to 56.7, a nine-month low, down from 58.1, while output prices also declined, signalling reduced inflationary pressures.

This comes as the euro zone’s headline inflation held at 2.0 per cent in June, as per official data, meeting the European Central Bank’s (ECB) target.

ECB decision looms as rate cut hopes build

The ECB is expected to hold interest rates steady at its July 25 meeting, according to all 84 economists surveyed by Reuters. However, a slight majority anticipate another rate cut later this year, most likely in September, if inflation continues to soften and growth remains fragile.

(With inputs from agencies)