Business activity in the eurozone returned to growth in July for the first time in four months

These positive trends could be undermined by high inflation and escalating tensions in the Middle East

Business activity in the eurozone returned to growth in July for the first time in four months, according to Reuters.

At the same time, analysts warn that the recovery may prove short-lived due to persistent inflationary pressures and a new escalation of the conflict in the Middle East.

S&P Global Flash’s composite PMI rose to 51.9 points in July from 50.0 in June. This is the highest reading in the last five months, which also exceeded Reuters’ forecast of 50.3.

As Henry Chambers, an economist at Capital Economics, noted, the rise in the eurozone’s composite PMI in July points to a revival in economic activity and an easing of inflationary pressures. At the same time, he emphasised that further increases in energy prices due to the escalation of the situation in the Middle East could quickly offset these positive trends.

In July, new orders rose for the first time since February, with the rate of growth reaching its highest level since April 2023. Meanwhile, export orders (including intra-eurozone trade) continued to decline, albeit at the slowest rate since March 2022.

The growth in business activity was supported by both the manufacturing and services sectors. Manufacturing output reached a 52-month high, whilst the sector’s PMI rose to 52.0 points from 51.4 a month earlier.

In Germany, economic activity also returned to growth, whilst in France the rate of contraction slowed. Other eurozone countries showed their strongest performance in the last eight months.

Outside the EU, positive developments were also seen in the UK, where business activity rose for the first time in three months, and business sentiment was at its most optimistic since the start of the escalation in the Middle East.

Furthermore, a slight increase in employment was recorded in the eurozone.

According to Paolo Grignani (Oxford Economics), the positive trends evident in the surveys are no longer news. In his view, the third quarter began with strong momentum, but this is expected to fade quickly, shifting the balance of risks in the second half of the year towards a downturn.

It should be recalled that on 23 July, the European Central Bank left its three key interest rates unchanged, citing high uncertainty linked to rising energy prices.