Eurozone PMI climbs back from the edge of contraction to the 50 mark. The European Central Bank may shift from a tightening stance to a more cautious approach.

Business and enterprise operations in the eurozone in the past month were better than initially expected, with the region's economic growth seeming to be stagnant rather than entering a recession process. Data released on Friday showed that the eurozone Composite Purchasing Managers' Index (PMI) compiled by S&P Global rose from 48.5 to 50, exactly at the dividing line between expansion and contraction of economic activity indicated by the Composite PMI. Boosted by better-than-expected German economic data, the final value of this Composite PMI for June was higher than the initial estimate of 49.5. "The easing negative trend in service sector business activities in the eurozone in June is good news for the market, and combined with the manufacturing growth pace, it means that the wider eurozone economy has stabilized after two consecutive months of output decline," said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. As shown in the figure above, private sector businesses in the eurozone were stagnating in the past month. This latest PMI result highlights the economic resilience of the region to geopolitical events in the Middle East, such as the geopolitical war between the US and Iran and the conflicts between Lebanon and Israel, which had previously pushed up inflation significantly and dampened consumer confidence. Although oil prices have dropped significantly after temporary peace negotiations between the US and Iran, the European Central Bank still implemented its first rate hike since 2023 in June and some economists believe that further rate hikes may be necessary to ensure that price pressures do not escalate further. However, policymakers at the European Central Bank are becoming increasingly divided on the next course of action. At the ECB's annual symposium in Portugal this week, some policymakers suggested that the rate hike last month might have been proven sufficient. The eurozone currently appears to be on the verge of moving from contraction caused by energy shocks back to stagnation rather than re-entering a strong recovery phase. The June Composite PMI was revised upwards to 50, indicating that the economy has just reached the breakeven point, but previous initial figures still showed a continuous decline in new orders for four months and the service industry remaining in contraction, indicating that domestic demand in the eurozone is not strong. The broader economic data in the eurozone shows a "weak growth, strong employment, and falling inflation" mixed state: the eurozone unemployment rate remained at a record low of 6.2% in May, indicating that eurozone businesses have not engaged in large-scale layoffs; however, overall inflation in June decreased from 3.2% to 2.8%, lower than the market's expectation of 3.0%, core inflation also decreased from 2.6% to 2.4%, and service inflation from 3.5% to 3.2%, suggesting that the fall in oil prices and cooling demand are weakening price pressures. These latest economic data seem insufficient to support immediate consecutive rate hikes by the European Central Bank, but enough to allow them to retain the option to increase rates again if inflationary pressures rebound. The logic behind the June rate hike was to prevent the spread of energy shocks from the Middle East, and the ECB's new forecast still shows inflation of around 3.0% in 2026, 2.3% in 2027, and returning to 2.0% in 2028; however, the rapid fall in oil prices, consumer expectations of one-year inflation decreasing from 4.0% to 3.5%, coupled with the eurozone economy just reaching the breakeven point, all weaken the necessity for immediate action in July. The market has priced in only about one-third probability of a rate hike in July, with a full pricing expected by October for a rate hike.