Strong expansion in the key services sector failed to offset further deterioration in manufacturing.
Euro zone business growth slowed sharply last month as strong expansion in the key services sector failed to offset further deterioration in manufacturing, the survey showed.
Composite PMI declines, remains in expansionary territory
The currency union's HCOB composite Purchasing Managers' Index (PMI), compiled by S&P Global and taken as a gauge of the overall health of the economy, fell to 50.9 in June from a 12-month high of 52.2 in May. Though the index remained just above the 50 mark that separates growth from contraction, the slowdown was clear.
Services sector drives growth
“Euro area growth is entirely driven by the services sector. While the manufacturing sector weakened significantly in June, growth in services sector activity remained roughly as strong as in the previous month,” said Cyrus de la Rubia, chief economist at Hamburg Merkbank.
Services PMI falls, manufacturing weakens
The services PMI fell to 52.8 from 53.2 last month but was above the initial forecast of 52.6. In contrast, manufacturing activity across the European Union worsened, with demand falling at a much faster pace even as factories slashed prices.
Weaker demand overall
The composite new business index, which tracks overall demand, fell to 49.4 from 51.6 in May, dropping below the breakeven mark of 50 for the first time since February. This came despite the European Central Bank delivering a widely expected interest rate cut in June.
ECB expects further rate cuts
The ECB is expected to cut rates further in September and December, according to a Reuters poll, but solid wages data and persistent price pressures have raised uncertainty about the case for further cuts.
Input and output cost pressures have indeed eased, with prices charged by service companies rising at the slowest pace in three years.
Read more: Eurozone business activity shows signs of recovery, with services sector leading the way
ECB takes cautious stance
Dell'Arrubia noted that the ECB “gave some support for this decision from the HCOB Services PMI price index,” but added that the central bank would “remain cautious, as price increases are still well above the pre-pandemic average and remain abnormally high given the fragile state of the economy.”
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