Growth in business activity in the euro zone slowed sharply in June as demand fell for the first time since February, a major survey showed on Friday. The euro zone's services sector showed signs of weakness and the slump in manufacturing worsened.
This comes despite the European Central Bank's widely reported interest rate cut earlier this month and a Reuters poll predicting two further rate cuts this year.
The preliminary HCOB composite Purchasing Managers' Index (PMI) compiled by S&P Global fell to 50.8 this month from 52.2 in May.
The decline belied a rise to 52.5 expected in a Reuters poll, bringing the index closer to the 50 mark that separates growth from contraction.
“The sharp fall in the euro zone composite PMI in June suggests that a robust recovery in the euro zone economy is not yet confirmed,” Franziska Palmas of Capital Economics said.
The overall new business index fell to 49.2 from 51.6, the lowest level in four months.
In Germany, Europe's largest economy, the recovery in business activity over the past two months slowed in June as weakness in manufacturing dragged down a stronger services sector, the PMI showed.
Election tensions
France's services sector contracted more than expected this month, dragged down by weak demand and financial market turmoil as the euro zone's second-largest economy heads to early parliamentary elections.
Marine Le Pen's far-right National Rally party is expected to lead the election, with three opinion polls released on Thursday showing it ahead of the left-wing National Front and President Emmanuel Macron's centrist party.
As far-right and far-left parties gain strength, investors are beginning to consider the risk of a fiscal crisis at the heart of the euro zone.
In Britain, which sits outside the European Union and faces a voting day next month, business expanded at its slowest pace since last year's recession as some companies put off big decisions until after the July 4 general election.
Polls suggest Keir Starmer's Labour party is on track to return to power for the first time since 2010. Chancellor Rishi Sunak's Conservative Party is heading for a historic defeat after the prime minister unexpectedly called an early general election last month.
Three opinion polls this week projected a record defeat for Mr Sunak's Conservative Party and predicted a comfortable majority for Labour.
Separate data released on Friday showed British retail sales recovered last month after heavy rains kept shoppers away in April.
ECB action
The PMI for the European Monetary Union's main services sector fell to 52.6 from 53.2, after a Reuters poll had forecast a rise to 53.5.
But inflationary pressures have eased, strengthening the case for the ECB to cut interest rates further this year. The services output price index fell to 53.7 from 54.2, the lowest in more than three years.
“Surveys show that price pressures have eased, which supports our view of a benign economic environment in line with expectations of very cautious monetary easing from the ECB,” said Bert Collin of ING.
Manufacturing activity has been sluggish for nearly two years and signs of a recovery have recently reversed. The manufacturing PMI fell to a six-month low of 45.6 from 47.3. A Reuters poll had forecast a rise to 47.9.
The index measuring production plummeted to 46.0 from 49.3.
The downturn has forced factories to cut staff for 13 consecutive months.
