The overall business and corporate activity in the Eurozone last month exceeded initial market expectations, suggesting the region's economic growth has stalled rather than entered a recessionary phase.
Data released on Friday showed the Eurozone Composite Purchasing Managers' Index (Composite PMI), compiled by S&P Global, rose from 48.5 to 50, landing precisely on the threshold that separates expansion from contraction in economic activity.
Driven by better-than-expected German economic data, the final reading for June's Composite PMI surpassed the preliminary estimate of 49.5.
"News that the downturn in Eurozone service sector business activity eased in June is welcome and, together with the pick-up in manufacturing output growth, means the wider Eurozone economy has stabilized after two months of falling output," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence.
As shown in the chart above, the Eurozone's private sector business activity stalled last month.
This latest PMI result underscores the region's economic resilience to geopolitical events in the Middle East, where conflicts had previously driven inflation sharply higher and dampened consumer confidence.
Although a temporary agreement in peace talks led to a significant drop in oil prices, the European Central Bank (ECB) still implemented its first interest rate cut since 2023 in June, and some economists believe further cuts could still be on the table to prevent price pressures from reigniting.
However, policymakers at the ECB are becoming increasingly divided over the next steps.
At the ECB's annual forum in Portugal this week, some policymakers hinted that last month's rate cut may have been sufficient.
The current situation in the Eurozone appears more like a return to stagnation from the brink of contraction following the energy shock, rather than a re-entry into a strong recovery phase.
The upward revision of the June Composite PMI to 50 indicates the economy is just at the expansion threshold; however, the preliminary data still showed new orders contracting for the fourth consecutive month and the services sector remaining in contraction territory, suggesting underlying domestic demand in the Eurozone is not robust.
Broader economic data for the Eurozone presents a mixed picture of "weak growth, strong employment, and receding inflation": the unemployment rate held steady at a record low of 6.2% in May, indicating businesses have not yet engaged in large-scale layoffs; meanwhile, overall inflation fell from 3.2% to 2.8% in June, below the market expectation of 3.0%, with core inflation dropping from 2.6% to 2.4% and services inflation declining from 3.5% to 3.2%, suggesting falling oil prices and cooling demand are dampening price pressures.
This latest set of economic data seems insufficient to warrant an immediate, consecutive rate cut from the ECB, but it is enough to preserve the option for another cut should secondary inflationary effects re-emerge.
The rationale for the June cut was to prevent the spread of energy shock effects from the Middle East; the ECB's new projections still show inflation around 3.0% in 2026, 2.3% in 2027, and only returning to the 2.0% target in 2028.
However, the rapid decline in oil prices, a drop in consumers' one-year inflation expectations from 4.0% to 3.5%, coupled with the Eurozone economy barely reaching the expansion threshold, all reduce the urgency for immediate action in July.
Markets are currently pricing in only about a one-third probability of a rate cut in July, with a full cut not fully priced in until October.
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