Last month, economic activity in the euro zone performed better than early estimates suggested, resulting in a flat performance instead of a decline. Friday's data showed the Composite PMI, compiled by S&P Global, rose to 50 from 48.5, hitting exactly the threshold dividing expansion from contraction. The final reading surpassed the preliminary flash estimate of 49.5, helped by surprisingly strong German data.
This outcome underscores how the euro area has withstood turmoil in the Middle East, which had fueled inflation and eroded sentiment. Oil prices have dropped considerably due to peace negotiations, but the ECB still implemented its first rate increase since 2023 in June and could follow up with another to prevent inflation from broadening. However, central bank officials are increasingly split over future policy moves. At the ECB's annual gathering in Portugal, several policymakers suggested that the June rate hike might be enough.
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S&P Global Market Intelligence's chief business economist, Chris Williamson, said, "An easing of downturn in eurozone service sector business activity during June is welcome news and, in conjunction with manufacturing growth, means the wider economy has stabilised after two months of falling output."
The neutral reading follows two consecutive months of contraction - April and May - when the composite index fell below the 50 threshold. Manufacturing had been showing pockets of resilience, while the service sector struggled. The euro zone's economy has been under pressure from high inflation and elevated borrowing costs, though the latest PMI data suggests the worst of the downturn may be over.
The service sector, which accounts for a large share of economic activity, had been contracting in recent months, but June's moderation in its decline, combined with ongoing manufacturing expansion, points to a more balanced picture. However, the ECB's rate hike in June and the potential for further tightening could restrain demand in the coming months, keeping the recovery fragile.
The service sector's downturn moderated while manufacturing output continued to expand, according to the survey. This combination points to a potential stabilization of the broader economy after a period of weakness. Still, the ECB's tightening stance could weigh on future growth, and policymakers will closely watch July's data to decide whether another rate hike is needed.
The stability in the PMI reading comes amid a complex economic backdrop. While the manufacturing sector has shown signs of resilience, the service sector's earlier downturn had raised concerns about the breadth of the recovery. Analysts note that the neutral PMI reading does not guarantee sustained growth, as elevated borrowing costs and uncertainty over future ECB moves continue to weigh on investment and consumer spending.
The euro traded at $1.14 as the news broke.
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