By Jonathan Cable
LONDON, July 24 (Reuters) – Euro zone business activity returned to growth in July for the first time in four months, driven by a rebound in new orders, but may be derailed by high inflation and renewed conflict in the Middle East, a survey showed on Friday.
The S&P Global Flash Euro zone Composite PMI Output Index rose to 51.9 in July from June’s 50.0, its highest reading in five months and far above an expectation in a Reuters poll for a modest rise to 50.3.
A reading above 50.0 signals an expansion in activity.
“The rise in the euro zone Composite PMI in July suggests activity is rebounding and inflationary pressures are easing,” said Henry Chambers at Capital Economics.
“But given the re-escalation in the conflict in the Middle East and the subsequent rise in energy prices, some of the improvements in both may be short-lived.”
New orders grew for the first time since February, with the pace of expansion the fastest since April 2023. Export orders, which include intra-euro zone trade, continued to decline, but the rate of decrease was the least pronounced since March 2022.
Both manufacturing and services contributed to the output rebound. Services recovered to a five-month high of 51.6, up from 49.4, snapping three months of contraction and confounding the Reuters poll for another month of declining activity. Manufacturing output growth hit a 52-month high and the headline factory PMI rose to 52.0 from 51.4, above the poll estimate for 51.5.
Activity in Germany, Europe’s largest economy, also returned to growth while in France the contraction eased with services output slowing only marginally. The rest of the euro zone posted its strongest expansion in eight months.
In Britain, outside the European Union, firms reported their first growth in three months and were the most upbeat since the conflict began, possibly providing early encouragement for new Prime Minister Andy Burnham.
Staffing levels rose in the euro zone, marking a shift after months of job shedding. The increase was marginal, as continued cuts in manufacturing employment tempered gains in the services industry.
“The strength visible in surveys is already old news: the only meaningful takeaway from today’s figures is that Q3 began with solid momentum, which we expect to fade rapidly, tilting the balance of risks to H2 growth to the downside,” said Paolo Grignani at Oxford Economics.
PRICE PRESSURES
The rate of overall input cost inflation eased to its lowest since February — at the end of which the Middle East conflict erupted — although pressures remained sharp, Friday’s PMIs showed.
Output price inflation also slowed. The easing may reduce pressure on the European Central Bank, which left its key deposit rate at 2.25% on Thursday. A recent Reuters poll suggested the bank would raise it by 25 basis points in September.
Inflation risks are high and the ECB may need to raise interest rates once again, three policymakers said on Friday, but all stopped short of calling for an outright hike in September.
The euro zone economy contracted 0.2% in the first quarter of 2026, weighed down by the impact of the Middle East conflict on energy supplies and inflation. The July PMI data suggests the bloc may be gaining some momentum heading into the second half of the year, though risks remain acute.
(Reporting by Jonathan Cable; Editing by Hugh Lawson)
Comments