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Euro-zone Flash PMIs (June)

Stagflation begins

  • June’s euro-zone PMI surveys showed a further slowdown in the services sector, while activity in the manufacturing sector now seems to be falling outright. With the price indices remaining extremely strong, the euro-zone appears to have entered a period of stagflation.
  • The sharp drop in the headline Composite PMI, from 54.8 in May to 51.9 in June, left it well short of even our below-consensus forecast. While it averaged 54.1 over Q2 as a whole, consistent with a decent expansion in activity in the second quarter, growth is now slowing as we head into Q3. (See Chart 1.)
  • The manufacturing output index dropped from 51.3 to 49.3, taking it below the 50 “no change” mark for the first time since June 2020. (See Chart 2.) Production might have dropped even further if firms weren’t still working through the backlog of unmet orders, as the new orders index fell to just 44.7. The services PMI fell to a five-month low, with the press release noting that consumer-facing sectors and real estate fared particularly badly. So the hit to households’ spending power from higher inflation might be starting to offset any gains from the re-opening of the tourism sector.
  • The new orders and future activity indices in both sectors pointed to further weakness to come. (See Chart 3.) And the country breakdown showed that growth slowed in Germany and France.
  • Meanwhile, the PMIs continued to highlight the extent of inflationary pressure, with both the input and output price indices close to record highs. (See Chart 4.) In fact, while the manufacturing input price index edged down, the services index rose further, adding to the evidence that the recent increase in inflation is not only due to surging energy costs, but also due to rising domestic price pressures. Indeed, as well as high energy prices and supply problems, the press release noted that firms also reported that rising wage growth was putting upward pressure on inflation. All of this is consistent with our view that inflation will remain well above the ECB’s target for a long time.

Chart 1: Composite PMI & GDP

Chart 2: Services & Manufacturing Output PMIs

Chart 3: New Orders Indices

Chart 4: Composite Input & Output Price PMIs

Sources: Refinitiv, S&P Global

Jack Allen-Reynolds, Senior Europe Economist,

Jack Allen-Reynolds Senior Europe Economist
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