Eurozone Economy Shows Signs of Stagnation Amid Geopolitical Tensions

The Eurozone Composite PMI for June stood at 50.2, nearly identical to the previous month, signaling stagnation in the region’s economic activity after a strong first quarter. Despite a resilient manufacturing sector, which has recently benefited from US frontloading and inventory adjustments, new downside risks have emerged, particularly with escalating tensions in the Middle East.

The manufacturing sector has been one of the brighter spots in the Eurozone’s economy, showing growth as demand from the US helped revive the industry. The Manufacturing Output PMI remained in expansion territory at 51 in June, although it slowed slightly from 51.5 in May. Encouragingly, new orders have begun to show signs of bottoming out after three years of decline, suggesting a potential rebound.

However, the services sector continues to lag, with its business activity index hovering near stagnation levels. The quarterly PMI average marks the weakest performance since late 2023, indicating a subdued economic climate for the second quarter. Although exports to the US bolstered growth in Q1, a reversal of frontloading could lead to negative growth for Q2.

Geopolitical uncertainty, particularly the escalating conflict between the US and Iran, has introduced new risks to the economic outlook. While the exact duration and scale of Iran’s potential response remain uncertain, it adds an additional layer of pressure on the Eurozone economy. The rise in energy prices, partly driven by geopolitical tensions, contributes to headline inflation and further challenges the energy-intensive manufacturing sector, which may see weaker prospects as energy costs rise.

This uncertainty continues to dampen both consumer and business confidence, further contributing to weaker output. As the region contends with these challenges, the overall picture of a stagnating economy now faces additional downside risks from the Middle Eastern tensions.