Eurozone PMIs: Weak demand shifts Eurozone recovery into lower gear

Euro Macro: The eurozone composite PMI for June declined compared to May but stayed in expansionary territory (at 50.8, down from 52.2 in May). This was an undershoot of consensus expectations, which expected a small increase compared to May. Today’s reading indicates the bloc’s economic activity is expanding in Q2 but the growth rate is edging down compared to Q1. This is consistent with our expectation for output to increase again in Q2 after the eurozone ended a five quarter period of stagnation in Q1 (we expect 0.2% q/q growth in Q2 following 0.3% in Q1).

Similar to last month, the services sector is driving the slower pace of expansion of business activity. The eurozone services PMI remained firmly in expansionary territory at 52.6, but edged down compared to the 53.2 in May. The manufacturing sector stayed clearly in recessionary territory at similar levels since the start of the year (at 45.6, 47.3 in May).

What drove the decline in the PMIs compared to May? It is mostly a story of weak demand. Indeed, the subcomponents for demand such as new orders in the manufacturing PMI and the new business subcomponent of the services PMI declined considerably. Declining export orders in manufacturing, particularly in Germany, is likely also some payback from strong net exports, which drove Q1 GDP growth. The weak recovery in demand is one reason why we expect eurozone GDP growth to remain below the trend rate in 2024.

The PMIs disappointing and the eurozone recovery slowing, as we anticipated in our most recent monthly, is supportive of our call of a September 25bp rate cut by the ECB (see more here). Furthermore, the easing of in- and output price pressures, for the second month in a row in the eurozone services sector, alongside a slight deterioration in overall labour market conditions according to the eurozone composite PMI, fits our view that disinflation will continue in the coming months.

German and French PMI’s drive the overall eurozone story. Looking at the major national indices, the June composite PMIs for France and Germany both declined compared to May missing consensus expectations of small increases. In both countries a dialling back of demand seems to drive the deterioration. This in their turn drove the decline in the eurozone aggregate (see above).

In France, the composite PMI fell to 48.2 from 48.9 in May and is consistent with a small decline in economic activity. Both the services PMI (48.8) and the manufacturing PMI (45.3) remained below neutral levels indicating declines in activity in both sectors. The outcome of the European Elections and the snap elections called for by Macron are likely adding to political uncertainty and weighing on future business outlook. Election uncertainty was flagged in the S&P Global press release for the French PMI as a factor mentioned by survey respondents.

In Germany, the composite PMI declined to 50.6 down from 52,4 in May but stayed above neutral indicating a slower pace of expansion in the German economy. The services sector is driving the expansion by remaining firmly above 50 at 53.5, down from 54.2 in May. The manufacturing sector on the other hand remains in contractionary territory at 43.4 down from 45.4 in May. Despite the decline in the composite PMI, the figure still suggests a slowly improving outlook for the Germany economy after a very weak 2023.