The Eurozone service sector contracted at a slower pace in June, as cost pressures eased at the fastest rate since the pandemic, according to the latest HCOB Eurozone Services PMI data published by S&P Global. While the sector remains in contraction territory with a reading of 49.4, the stabilization of economic output suggests a shift in momentum following two months of decline.
What the June PMI Data Reveals
The HCOB Eurozone Services PMI reached 49.4 in June, up from 47.7 in May. While this figure remains below the 50.0 threshold that separates expansion from contraction, it marks the third consecutive month of contraction. Despite the contraction, the pace of the slowdown has moderated.
According to Chris Williamson, chief economist at S&P Global Market Intelligence, the stabilization of the broader economy is supported by growth in the manufacturing sector, which helped offset the continued, albeit slower, decline in services. The composite PMI, which aggregates both services and manufacturing, rose to 50.0 in June, up from 48.5 in May.
How Cost Pressures Are Evolving
A significant factor in the June data is the reduction in input cost inflation. Within the service sector, inflation for input costs slowed for the first time since October, reaching a four-month low. Excluding the period of COVID-19 lockdowns in early 2020, this represents the most significant easing of cost pressures since data collection began in 1998.
While consumer demand for services continued to decline in June, the rate of this decrease slowed compared to May. Businesses reported that the impact of high energy prices, which has been a primary drag on consumer demand since the onset of the war in the Middle East, showed clearer signs of cooling.
What This Means for the European Central Bank
The European Central Bank (BCE) maintains an inflation target. Official data released Wednesday showed Eurozone inflation for June at 2.8%, a figure that remains above the central bank’s target of 2.0% despite coming in below forecasts.
The rapid cooling of cost pressures could influence the BCE’s policy trajectory. With the easing of input costs, it could reduce the pressure on officials at the BCE to raise interest rates further, as they await better visibility on the speed at which price pressures are fading. The BCE raised its key rates in June for the first time in nearly three years, and officials are awaiting further data to gauge the speed at which price pressures are fading across the bloc.
Key Takeaways
- Sector Performance: The Eurozone Services PMI rose to 49.4 in June from 47.7 in May, signaling a slowing rate of contraction.
- Economic Stabilization: The composite PMI, covering both services and manufacturing, reached 50.0, indicating the economy has effectively stabilized after two months of falling production.
- Employment Trends: Despite a drop in new orders, service sector companies increased hiring in June at the fastest pace since January.
- Inflationary Pressure: Input cost inflation in the services sector dropped to a four-month low, marking the sharpest decline since the 2020 pandemic era.
- Business Outlook: Sentiment regarding the business climate among service providers reached its highest level since February.