Eurozone PMIs fell again in July, with the composite index dropping to 48.9 from 49.9 in June. The weakness was widespread across all sectors, with the manufacturing PMIs at its lowest level since early 2020. Service fell, but it remained in the expansionary territory. The recent disinflationary trend continued on the back of lower input costs, although prices in the services sector continue to prove stickier. Employment intentions increased only modestly, pointing to easing tightness in the labour market.

Today's print confirms that the deterioration in macroeconomic conditions is well underway and spreading from manufacturing to other sectors. In our baseline case we expect subdued growth for the second half of the year, but today’s data suggest that the risk of a small contraction in eurozone GDP in Q3 is increasing.

In Germany, the composite PMI fell to 48.3, below the 50 mark. The manufacturing PMI now stands at 38.8, which is particularly discouraging as readings below 40 were only seen during the financial crisis and the pandemic. A similar trend was seen in France, where the composite PMI fell to 46.6, with both the manufacturing and services PMIs falling further compared with June.

The Spanish elections ended in a deadlock, with the centre-right Partido Popular winning the most seats but unable to form a coalition due to a larger-than-expected drop in support for far-right Vox. We believe there is a significant risk of new elections.