Eurozone economy stagnates in June despite brighter signals from manufacturing

The eurozone economy showed minimal signs of recovery in June, with the latest Flash Purchasing Managers’ Index (PMI) data indicating that business activity remained effectively stagnant for a second month in a row. According to S&P Global and Hamburg Commercial Bank, the HCOB Flash Eurozone Composite PMI remained at 50.2, only just above the 50.0 threshold that separates growth from contraction, and well below expectations of 50.5. The data reflects a worrying continuation of the bloc’s economic malaise, with little overall momentum in either the services or manufacturing sectors.

The report follows a string of weak PMI readings this year, suggesting that the eurozone’s fragile post-pandemic recovery remains under pressure from geopolitical tensions, slowing global trade, and persistent consumer caution.

Modest progress in manufacturing, services remain flat

While the services sector returned to the break-even 50.0 mark in June, up slightly from 49.7 in May, it signals no meaningful growth and reflects continued subdued demand across the bloc. The manufacturing PMI remained unchanged at 49.4, marking nearly two years in contraction territory. A separate index tracking manufacturing output fell to 51.0 from 51.5, suggesting a moderation in factory activity growth.

However, there were pockets of encouragement, particularly in Germany, where manufacturers reported the strongest rise in new orders since February 2022. This suggests a steadying of the sector after a multi-year downturn. The improvement has been partially attributed to increased fiscal spending, including Germany’s relaxation of its debt brake, as well as a temporary boost from firms' front-loading exports ahead of expected US tariffs in July.

France, by contrast, saw its downturn worsen, with declines in both services and manufacturing activity, dragging on the overall eurozone performance. “Business activity in Germany returned to growth, but this was offset by a steeper downturn in France and slower growth elsewhere,” said analysts at S&P Global.

Inflation eases, fuelling expectations of further ECB rate cuts

The data also pointed to easing inflationary pressures, giving the European Central Bank (ECB) more room to manoeuvre on monetary policy. Eurozone inflation fell to 1.9 per cent in May, below the ECB’s 2 per cent target. While service-sector inflation remained “slightly tense”, price growth in goods declined for the second consecutive month.

The ECB has already cut interest rates eight times since the spring of 2024, bringing the deposit rate down from 4 per cent to 2 per cent. June’s PMI data shows muted employment growth and subdued pricing pressure, reinforcing the view that another rate cut could follow in the autumn if growth and inflation remain soft.

A composite gauge that combines output and inflation data suggests the bloc remains firmly in rate-cutting territory, supporting the ECB’s cautious easing cycle. “The PMI continues to signal subdued demand and output, making a compelling case for another cut,” said Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.

Business confidence ticks up despite geopolitical instability

Amidst the sluggish growth, the PMI survey found a modest uptick in business confidence, with expectations about future output improving to the highest since January. Optimism strengthened in the services sector and among German manufacturers, though sentiment elsewhere in the eurozone remained mixed.

Nonetheless, overall demand in the bloc has now fallen for 13 consecutive months, even as the rate of decline moderated in June. Firms remain cautious about West Asia energy tensions, trade uncertainties, and the potential impact of US tariffs, all of which could weigh on economic activity in the second half of the year.