Euro zone growth stalls in June with sluggish services, manufacturing

The Eurozone economy effectively flatlined for a second consecutive month in June, with the HCOB Composite PMI holding at 50.2, barely above the growth threshold and below analyst expectations, indicating broad-based weakness as the dominant services sector barely expanded (50.0) and manufacturing remained in contraction (49.4). While Germany saw a return to manufacturing-led growth, France experienced further contraction, and overall demand declined for a 13th month. This persistent stagnation, alongside falling factory selling prices, presents a complex backdrop for the European Central Bank following its recent rate cut and May's inflation dip below 2%.

Analysis

The Eurozone economy exhibited significant stagnation for a second consecutive month in June, with the HCOB composite PMI holding at 50.2, just above the 50.0 growth threshold and below analyst expectations. This flatlining performance is broad-based, as the bloc's dominant services industry stalled at the 50.0 break-even mark, while the manufacturing sector remained in contractionary territory at 49.4, a state it has been in since mid-2022. The aggregate data conceals a stark divergence between the bloc's two largest economies: Germany showed signs of a manufacturing-led recovery with its strongest increase in new orders in over three years, whereas France experienced an accelerated contraction in both its manufacturing and services sectors. Despite a slight uptick, overall new business demand fell for the 13th consecutive month, and factories continued to cut selling prices, indicating persistent disinflationary pressure. This backdrop of weak growth and falling prices presents a complex challenge for the European Central Bank, which recently cut its deposit rate but signaled a pause, even as May inflation dipped below its 2% target.

Key Decisions for Investors

• Given the economic stagnation and significant divergence between a recovering Germany and a contracting France, investors should consider a highly selective approach to European equities, potentially overweighting German industrials while remaining cautious on French-exposed assets.
• The persistent economic weakness and disinflationary price signals from factories may challenge the European Central Bank's signaled pause on rate cuts, suggesting investors should monitor for a potential shift towards a more accommodative monetary policy than currently communicated.
• The combination of stagnant growth, contracting demand for a 13th consecutive month, and disinflationary pressures could exert downward pressure on the Euro, prompting consideration for hedging currency risk on unhedged European asset holdings.