Economic expansion in the Eurozone takes an unexpected turn in July, raising questions about whether the worst of the economic downturn might finally be behind us.
The Eurozone economy is displaying signs of a cautious recovery, according to the latest Purchasing Managers' Index (PMI) reports for July 2025. The Flash Composite PMI, a key indicator of overall economic health, rose to 51.0 from 50.6, marking the highest level since August 2024 and signalling a stronger start to the third quarter of the year.
The services sector is leading the recovery, with the services PMI increasing to 51.2 from 50.5, marking the fastest expansion since January 2025. On the other hand, the manufacturing sector remains slightly below growth territory but shows signs of stabilisation. The manufacturing PMI rose to 49.8 from 49.5, close to the 50 growth threshold. Factory orders declined but at a slower pace, and production is near equilibrium.
One of the positive developments is the improvement in employment. Businesses are hiring more staff in response to rising activity and steadier order books. This trend is particularly evident in Germany, where the private sector growth remains moderate but shows stability in services and a cautious improvement in manufacturing.
Inflation pressures are also easing, with the pace of inflation falling to a nine-month low and remaining below historical averages. This trend is expected to continue, offering relief to businesses and consumers alike.
However, the recovery is not without its challenges. Recent fiscal measures in major Eurozone economies, especially Germany, are expected to provide growth support from 2026 onwards. However, current challenges include weak external demand, policy uncertainty in France, and fiscal tightening in the UK regionally impacting confidence.
The manufacturing sector remains vulnerable, with France experiencing another contraction in activity, though at the slowest pace in the current 11-month downturn. The EU member states have adopted a retaliatory hit list in response to US tariffs, adding to the uncertainty in the region.
Overall, the Eurozone economy is showing steady progress with fading inflation risks and stabilising activity, particularly in services. However, the manufacturing sector remains fragile, and a cautious watchfulness remains necessary due to external and structural risks.
[1] Flash Composite PMI, services PMI, and manufacturing PMI data from IHS Markit. [2] HCOB Flash PMIs from Markit Economics. [3] European Commission economic forecasts. [4] Employment data from Eurostat.
- In response to rising activity and steadier order books, businesses are boosting their staff hiring, particularly in Germany where both the services and manufacturing sectors are showing stability.
- Even though the services sector is driving the recovery, the manufacturing sector remains sensitive, with France experiencing another contraction in activity and EU member states adopting a retaliatory hit list in response to US tariffs.
