Eurozone PMI drops again in June, confirming weakness in economy.

The PMI dropped sharply in June, giving a broad sense of weakening economic activity towards the end of the quarter. Another quarter of negative GDP growth is not unimaginable, although the current slump clearly remains mild enough for the European Central Bank not to change course on rate hikes.

The composite Purchasing Managers' Index (PMI) fell from 52.8 to 50.3, showing a continuation of the decline observed in May. This survey suggests a widespread stagnation in the economy, which accurately reflects the current state of economic activity. The manufacturing sector experienced a further downturn, with the output PMI dropping from 46.4 to 44.6. On the other hand, the services index is still growing, albeit at a significantly slower pace (services PMI decreased from 55.1 to 52.4). This indicates that the initial boost in services activity following the reopening is fading, contributing to the overall sluggish economic environment we are currently experiencing.

In summary, the Eurozone economy appears to have entered a sluggish phase with negligible economic growth. Considering the weak PMI reading in May and the underwhelming production and sales data for April, the latest PMI figures provide additional evidence that the anticipated rebound from two consecutive quarters of negative growth is likely to disappoint. In fact, the likelihood of another quarter of negative growth is increasing.

One positive aspect of the weak economic situation is the diminishing inflationary pressures. According to the PMI data, there has been another month of easing price pressures in both the manufacturing and services sectors, although the services sector still faces more significant challenges in this regard. Nonetheless, the overall trend is positive, as the average prices charged for goods and services increased at the slowest rate in over two years.

Given the combination of a sluggish economic outlook and improving inflation, the ECB is leaning towards a dovish stance. However, these factors alone are unlikely to prompt the bank to change its direction on rate hikes. Currently, policymakers seem to favour a more cautious approach, preferring a potentially excessive tightening of monetary policy rather than insufficient measures. This positioning sets the stage for a potential rate hike in September.

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