Eurozone Business Activity Stagnates at 50.2 PMI Despite ECB Rate Cut

Eurozone business activity remained stagnant in June, with the Purchasing Manager’s Index (PMI) holding steady at 50.2 points. This stagnation is attributed to the weak performance of both the manufacturing and service sectors within the region. The PMI data indicates that private sector business activities are still struggling to recover, with the services sector jumping to 50 points from 49.7 and the manufacturing PMI remaining unchanged at 49.4. The overall PMI was slightly below market expectations of 50.5 points and barely above the 50 mark that separates growth from contraction.

Despite the European Central Bank's (ECB) recent reduction of its deposit facility rate by 25 basis points to 2.00%, business activities in the eurozone have not shown significant improvement. Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that the eurozone economy has struggled to gain momentum for six months, with minimal growth and stagnation in the services sector. Manufacturing output has risen only moderately, and the overall economic activity has remained unchanged.

Regional disparities are becoming more pronounced, with Germany, the largest economy in the region, showing a marginal return to growth. The flash composite PMI for Germany rose to 50.4 in June from 48.5 in May, driven by increased demand in the manufacturing sector. This marks the fastest rise in three years, and there is a good chance that Germany could break out of its stop-start growth pattern after two years of stagnation. However, the German services sector PMI rose to 49.4 in June, up from 47.1 in May, which surpassed market expectations of 47.5. Despite this slight increase in activity, the composite PMI for Germany dropped to 48.5 in June from 49.3 in May, marking the tenth consecutive monthly decline.

Manufacturing and services business activities in the eurozone have declined, with firms citing low domestic demand, intensifying international competition, and uncertainty surrounding global trade. Sales have fallen sharply for the thirteenth consecutive month in June, with factory orders declining sharply, last seen in February. The outlook for the eurozone remains uncertain, with persistent cost increases in services and renewed geopolitical tensions potentially discouraging further monetary easing despite easing inflation pressures in the goods sector. Markets expect the ECB to hold its interest rate benchmark steady at 2.00% during the next policy meeting on 23-24 July.

The recent U.S. strike on Iran has added to the volatile economic landscape, with renewed fears of a long-term conflict in the Middle East. This conflict could potentially trigger oil prices, as at least 20% of global crude oil shipments pass through the Strait of Hormuz. Additionally, the 90-day pause on a reciprocal tariff truce is set to expire on 9 July, creating more uncertainty in the region. Negotiations are still ongoing, although Europe has not secured a trade agreement to avoid another wave of disruptions in business activities.