Eurozone services contraction eases as inflation cools at record pace

The eurozone's private sector showed signs of stabilization in June after two months of declining output, as cost pressures eased at the sharpest rate on record outside of pandemic-era lockdowns, according to final survey data released on Friday by S&P Global ↗ 6.01%.

The final S&P Global Eurozone Composite PMI rose to a three-month high from 48.5 in May, with the services component climbing to 49.4 from 47.7, beating a preliminary estimate of 48.9. While the readings remain below the 50-mark separating expansion from contraction, the improvement suggests the downturn triggered by the Middle East conflict and the European Central Bank's June rate hike is losing momentum.pmi.spglobal+1

Services Recovery Led by Spain, Dragged by France

The recovery was uneven across the bloc's largest economies. Spain's services sector expanded at its strongest pace of 2026, with the Services PMI jumping to 54.2 from 50.1 in May on the back of stronger domestic demand, according to Reuters. Germany's services contraction eased modestly, with the final PMI rising to 48.6 from 48.1, though the country's composite reading of 49.5 pointed to near-stagnation.reuters+1

France remained the weakest link. Its services PMI rose to 46.8 from 44.3 in May but came in below the flash estimate of 47.4, as sluggish demand and lingering inflationary pressures weighed on businesses. The composite reading of 47.6 left France well below the contraction threshold.reuters

Inflation Eases, Complicating ECB Calculus

The sharpest cooling in input costs since the pandemic lockdowns offers a counterweight to the ECB's hawkish stance. The central bank raised its deposit rate to 2.25% at its June meeting — its first hike since September 2023 — citing inflation projections of 3.0% for 2026. Officials had signaled they were open to further increases as soon as September if energy prices remained elevated.reuters

The PMI data now complicate that calculus. Input cost inflation in the services sector fell for the first time since October, dropping to a four-month low. The decline reflects easing energy costs following what Reuters described as signs of de-escalation in the Middle East conflict. ECB President Christine Lagarde had noted last week that the conflict "does not require a more decisive reaction" from monetary policy, as inflation is expected to return to 2% over the medium term.cbcg+3

Demand Remains the Weak Spot

Despite the inflation reprieve, underlying demand showed few signs of recovery. New orders across the eurozone fell for the fourth consecutive month in June, extending a streak that has persisted since the conflict-driven downturn began in the spring. The manufacturing sector, while still in expansion territory at 51.4, slowed from 51.6 in May amid weakening export orders.reuters+3