Eurozone composite PMI hits 50.0 as services cost pressures cool

The euro area private sector stabilized in June after two months of contraction, with S&P Global's composite output index rising to 50.0 from 48.5 in May, as services cost pressures cooled at the second-fastest pace on record outside of pandemic-era lockdowns.

"The easing of the downturn in euro zone service sector business activity during June is welcome news and, in conjunction with manufacturing growth, means the wider economy has stabilized after two months of falling output," Chris Williamson, chief business economist at S&P Global Market Intelligence, said in a statement.

The final reading exceeded the flash estimate of 49.5, driven largely by an upward revision in Germany. The country's composite PMI was revised to 49.5 from a preliminary 48.0, while its services PMI jumped to 48.6 from the flash reading of 46.8 — the highest in the current three-month sequence of contraction. France remained in contraction for a sixth straight month with a composite reading of 47.2, though that improved from May's 28-month low of 44.9. Italy and Spain posted stronger expansions, with composite readings of 50.8 and 53.3 respectively.

Services input cost inflation eased in June for the first time since October, dropping to a four-month low. The rate of deceleration was the steepest since S&P Global began tracking the data in 1998, exceeded only by the COVID-19 lockdowns of early 2020. Output charges rose by the smallest margin since March. The cooling in cost pressures comes as oil prices fell for a third consecutive day after Qatar said Iran and the U.S. had made progress in talks over the Strait of Hormuz, easing concerns about supply disruptions.

The data complicates the European Central Bank's policy path after it raised interest rates in June for the first time in nearly three years. Euro area inflation came in at 2.8% last month, still well above the ECB's 2% target, but the near-unprecedented cooling of services cost pressures strengthens the case for a pause among officials who signaled at this week's Sintra conference that last month's move may have been sufficient. The last time the ECB delivered a single hike followed by a hold was in 2011, when the euro area subsequently slipped into recession — a precedent that underscores the delicate balance between inflation control and growth support.

Despite the stabilization in activity, demand remained weak. New orders for services fell for a third consecutive month, and foreign orders declined again, though at a slower pace than in May. Order backlogs continued to shrink as companies worked through existing contracts. Employment across the euro area services sector was virtually unchanged in June, though it posted the fastest pace of hiring since January, reversing a small reduction in May. Business confidence improved to its highest level since February, suggesting firms expect conditions to improve in the second half of the year.

The divergence across the bloc highlights the uneven nature of the recovery. Germany's near-stabilization — its composite PMI at 49.5 is just shy of the 50 threshold — suggests Europe's largest economy may be emerging from its soft patch, while France's prolonged contraction points to persistent structural headwinds. The peripheral strength in Italy and Spain, where services PMIs rose to 50.2 and 54.2 respectively, provided the counterweight that lifted the aggregate reading to 50.0.

For the ECB, the data reduces the urgency for further tightening. Markets will now focus on whether the cooling in services inflation extends into the third quarter, and whether the stabilization in output can be sustained without a recovery in new orders. The next ECB meeting on July 24 will offer the first test of whether policymakers view June's data as sufficient grounds for a pause.

This article is for informational purposes only and does not constitute investment advice.