Eurozone PMI rises to 49.5 as peace deal cools energy costs

Cooling energy costs after the US-Iran interim peace deal pushed eurozone business costs to their slowest pace of increase since the conflict began, though activity remained in contraction territory.

S&P Global's composite purchasing managers' index for the eurozone rose to 49.5 in June from 48.5 in May, the surveys published Tuesday showed, remaining below the 50.0 threshold that separates expansion from contraction. The reading suggests the eurozone economy is at risk of contracting for a second straight quarter, a sequence economists sometimes refer to as a technical recession.

"The eurozone economy is showing enough resilience to just about stay out of recession," said Chris Williamson, chief business economist at S&P Global Market Intelligence.

Businesses across the currency bloc reported that input costs rose at the slowest pace since the outbreak of the Middle East conflict in late February, following the tentative peace agreement between the US and Iran announced in mid-June. Oil and natural gas prices have fallen sharply since the deal, though economists at Societe Generale cautioned that a rapid return to normal energy flows through the Strait of Hormuz is unlikely given logistical constraints including mine clearance and routing bottlenecks.

The European Central Bank earlier this month became the first among its major peers to raise borrowing costs in response to the jump in energy prices, and the PMI data will feed into the debate over whether further tightening is needed. The ECB's next policy meeting is scheduled for July 24.

Cross-Asset Transmission

The decline in energy costs has rippled across global markets. The World Bank projects global economic growth will slow to 2.5% in 2026 from 2.9% in 2025 if shipments through the Strait of Hormuz begin returning to normal from August. That outlook, published earlier this month, assumes a gradual recovery rather than an immediate reopening.

In Asia, the picture was more mixed. Japan's composite PMI rose to 52.5 from 51.1, remaining in expansion territory, but the momentum may be fragile. "It is important to note that the current period of growth is partly being driven by stockpiling efforts, and these efforts are likely to fade in the months ahead," said Annabel Fiddes, economics associate director at S&P Global Market Intelligence. Japanese firms reported the sharpest rise in input costs since July 2022, bucking the global trend of cooling price pressures.

India's PMI stayed firmly in expansion at 57.4 in June, though the pace of growth weakened as inventory-building lost steam.

Policy Divergence Ahead

Central banks have responded cautiously to the prospect of lower energy costs. The Bank of Japan raised its key interest rate last week, while the Federal Reserve and several European central banks have signaled they may yet increase borrowing costs to contain inflationary pressures that built during the conflict. The Fed's next decision is due July 29, with markets pricing an 85% probability of at least a 25-basis-point rate hike before year-end, according to the CME FedWatch tool.

For the eurozone, the path forward hinges on how quickly the peace dividend flows through to the real economy. If energy supplies normalize gradually as Societe Generale expects, manufacturing output may remain subdued as businesses draw on inventories accumulated during the conflict. That dynamic could keep the composite PMI below 50 for several more months, prolonging the region's economic fragility.

This article is for informational purposes only and does not constitute investment advice.