Eurozone private sector expands in June: Spain outperforms, France shrinks

Private sector activity in the euro area rose in June, above previous estimates, indicating that the economic recovery is progressing as planned, although there are significant differences across member states.

The seasonally adjusted Hamburg Commercial Bank (HCOB) Eurozone Composite PMI Output Index – a measure of conditions in the services and manufacturing sectors – came in at 50.9, marking the fourth month in a row above an unchanged 50.0. This was a slight decline in the pace of expansion from May’s 52.2 but slightly better than the initial estimate of 50.8.

The upward revision is due to a revision in the pace of expansion in the services sector, with the HCOB Eurozone Services PMI coming in at 52.8 in June, down from a previous estimate of 52.6 but down from 52.3 in May. This marks the fifth consecutive monthly expansion in the services sector.

“Economic growth in the eurozone can be entirely attributed to the services sector,” commented Dr Cyrus de la Rubia, chief economist at HCOB.

The eurozone’s services sector is benefiting from large numbers of tourists, de la Rubia said. A new export index that includes tourism has been rising steadily for six months and is now almost two points above its long-term average.

The European Central Bank’s (ECB) interest rate cut in June finds some justification in the dynamics of the HCOB Services PMI price indices. Input prices and prices charged to customers rose at the slowest rate in three years.

Almost all eurozone countries for which PMI data are available recorded growth in June, except France.

Spain leads growth, boosted by tourism and interest rate outlook

Spain continues to be the fastest-growing economy in the eurozone, with output rising sharply, likely helped by a strong tourist season and an improving interest rate outlook.

Spain’s HCOB services sector PMI came in at 56.8 in June, up from 56.4 in the previous estimate and only slightly below May’s 13-month high of 56.9. This marked the 10th consecutive month of expansion in Spain’s services sector, supported by strong demand from domestic and international clients.

Employment in Spain rose at a faster pace for the 21st consecutive month as companies added staff to meet current and expected demand. However, this increase in employment also resulted in higher wages in June.

“Some panelists believe that economic activity will continue to grow during the year due to lower inflation and lower interest rates,” said Jonas Feldhusen, junior economist at HCOB.

Feldhusen predicts that economic growth in the second quarter will be above the historical average, following strong GDP revisions in the previous two quarters.

France’s private sector restricts activity amid election turmoil

France was an exception as private sector business activity weakened for a second consecutive month.

The HCOB Composite PMI index in France showed a slight improvement compared to the previous month but remained below 50, indicating a recession.

“The upcoming election has made service providers less optimistic about future activity. In addition to being at a five-month low, business confidence is also clearly below its historical average. In line with this, employment growth has weakened,” said Norman Liebke, economist at HCOB.

The upcoming election seems to be a significant factor, Liebke said, especially since new orders have fallen sharply. French service companies have been working through backlogs in response to weaker demand, which explains the discrepancy between production and new orders.

Moreover, although services price inflation in France has been gradually declining, it remains a concern due to the recent historically high increase in input prices, with businesses reporting rising wage costs and higher raw material prices.