Euro zone business activity growth hits 11-month high in July, PMI shows

Euro zone business activity accelerated faster than forecast in July, with the HCOB composite PMI reaching an 11-month high of 51.0, driven by a robust services sector (51.2) and manufacturing showing signs of recovery at 49.8. New business activity also hit its highest level since May 2024, while inflationary pressures eased, with services input prices falling to a nine-month low. This data indicates a gradual regaining of economic momentum and supports expectations for the European Central Bank to hold policy steady, with a potential rate cut anticipated later.

Analysis

Euro zone business activity showed a faster-than-forecast acceleration in July, with the HCOB preliminary composite PMI rising to an 11-month high of 51.0, moving further into expansionary territory from 50.6 in June. This uptick was primarily driven by a solid improvement in the services sector, where the PMI increased to 51.2, beating expectations. The manufacturing sector, while still in contractionary territory for the third consecutive year, demonstrated signs of recovery as its PMI climbed to 49.8 from 49.5. Critically, overall demand stabilized, with the composite new business index hitting 50.0 for the first time in over a year. Concurrently, inflationary pressures eased significantly; the services input prices index fell to a nine-month low. This data, which follows an official June inflation reading of 2.0%, reinforces consensus expectations for the European Central Bank to maintain its current policy stance, with a potential interest rate cut anticipated in September.

Key Decisions for Investors

• The combination of accelerating economic activity and easing inflation reduces recessionary fears for the Euro zone, supporting a more constructive outlook for European equities, especially in the services sector.
• Given that inflation has met the ECB's target, investors should position for the central bank to hold rates steady in the immediate term, with the growing probability of a rate cut in September potentially benefiting both regional equities and fixed-income assets.
• Monitor the divergence between the robust services sector and the still-contracting manufacturing sector; a sustained, broad-based recovery will require the manufacturing PMI to decisively cross the 50.0 growth threshold.