Eurozone business activity expanded for the first time in four months in July, but a simultaneous escalation in the US-Iran conflict threatens to reignite the inflation pressures that had only just begun to ease.
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Eurozone PMI jumps to 51.9 as German manufacturing rebounds in July
Eurozone private-sector activity unexpectedly accelerated to a five-month high in July, with S&P Global's composite Purchasing Managers' Index rising to 51.9 from 49.5 in June, surpassing all but one economist forecast in a Bloomberg survey that had a median estimate of 50.2.
"The euro area made a positive start to the third quarter, but the path to sustainable recovery remains highly uncertain given the renewed upward pressure on international energy prices," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
Germany led the improvement, with its composite PMI climbing to 51.2 from 49.5, ending three consecutive months of contraction. The country's manufacturing PMI surged to 52.2, a four-month high, driven by the strongest production growth in nearly four and a half years and a pickup in new export orders. France's composite PMI rose to 49.6 from 47.2, the highest since February, as its services PMI hit 49.8 — the strongest reading since December 2025 — though both remained in contraction territory.
The data offers a reprieve for the European Central Bank, which held interest rates unchanged on July 23 after becoming the first Group of Seven central bank to hike following the Middle East conflict's onset. Input cost inflation across the euro area slowed to its lowest since the conflict began, which Williamson said would "reduce the pressure on the ECB to implement further emergency rate hikes." But with the US and Iran engaged in escalating military hostilities, Brent crude prices have risen, threatening to reverse the disinflation trend and complicate the ECB's September policy discussion, where officials are leaning toward debating another rate increase, according to people familiar with the matter.
Germany's Manufacturing Revival Masks Services Weakness
The manufacturing sector was the standout performer in Germany's July data. S&P Global's Phil Smith, associate director of economics, said the production growth rate reached its highest level in nearly four and a half years, supported by rising new orders — particularly from overseas — and a slowdown in cost inflation that provided some breathing room for factories. The services sector showed signs of stabilizing, with its PMI rising to 49.6 from 48.6, though it remained below the 50 threshold that separates expansion from contraction.
France's Recovery Hinges on Services Momentum
France's improvement was driven entirely by services, where business activity reached its strongest level since December 2025 and demand increased for the first time in five months. Joe Hayes, senior chief economist at S&P Global Market Intelligence, cautioned that expectations for sustained improvement may be overly optimistic given renewed pressure in oil and gas markets. French consumer confidence has deteriorated, and the government has cut its 2026 growth forecast to 0.7 percent from 0.9 percent, while acknowledging it will miss this year's budget deficit target.
Structural Headwinds Persist Beneath the Surface
Despite the July rebound, both Germany and France face structural challenges that cloud the outlook. Germany's government and central bank have each cut their 2026 growth forecasts to 0.5 percent, with expansion relying heavily on public infrastructure and defense spending. Chancellor Friedrich Merz's recent push to revive investor confidence — reflected in a modest uptick in the Ifo business climate index — remains vulnerable to geopolitical shocks. In France, political uncertainty ahead of next year's presidential election, combined with strained relations between the executive and parliament that have triggered multiple no-confidence votes, continues to weigh on business and household sentiment.
The Energy Wildcard
The most immediate threat to the recovery comes from the energy market. The US-Iran military escalation that intensified over the past week has pushed international oil prices higher, raising the risk that the cost relief manufacturers enjoyed in July will prove short-lived. S&P Global's Smith noted that service companies already faced stronger cost pressures in July, and with oil prices rising again, "there is a possibility of entering a period where inflationary pressures increase once more." Bloomberg senior economist David Powell said the recovery would have stronger staying power only if energy costs decline in the second half of the year.
This article is for informational purposes only and does not constitute investment advice.
[1] Eurozone July PMI unexpectedly rises to five-month high, German manufacturing rebounds, French services recover, but recovery still threatened by oil prices[2] Euro-Zone Business Activity Unexpectedly Jumps to 5-Month-High[3] Germany's composite PMI expected to grow in July; manufacturing leads[4] German business activity returns to growth after four months, PMI shows[5] Germany's July Composite PMI Preliminary Reading Hits 51.2, Highest in Four Months
