July surveys show the currency bloc returning to growth as Spain surges and Germany stabilizes, although inflation, energy costs and Middle East uncertainty continue to threaten the rebound.
The eurozone economy entered the third quarter with renewed momentum as service-sector activity recovered and manufacturing continued to strengthen, offering evidence that the region may be moving beyond the stagnation that marked much of the first half of the year.
The S&P Global Eurozone Composite Purchasing Managers’ Index, which tracks activity across manufacturing and services, rose to 52.0 in July from 50.0 in June. A reading above 50 indicates expansion. The result represented an eight-month high and marked the first clear expansion in private-sector activity since March. The services index climbed particularly sharply, rising to a five-month high of 51.7 from 49.4.
The improvement was supported by stronger domestic demand. New orders across the eurozone increased at their fastest rate since November, as service providers reported a revival in new business and manufacturers recorded a modest improvement in orders. Export demand remained weak, but the decline in international orders was the least severe in more than a year. Employment also stabilized after six consecutive months of job losses, suggesting that businesses are becoming less defensive about staffing.
The recovery, however, remains strikingly uneven.
Spain emerged as the strongest of the eurozone’s major economies. Its services PMI jumped to 58.3 in July from 54.2 in June, the highest reading since March 2023. New business rose rapidly, hiring accelerated for a third consecutive month and the country’s composite index reached a 19-month high of 56.5. Spanish companies nevertheless remained cautious about the longer-term outlook because of domestic and international political uncertainty.
Italy also recorded a stronger-than-expected expansion. Its services index rose to 52.5 from 50.2, comfortably exceeding economists’ forecasts. New business reached its highest level of the year, employment increased and input-cost pressures moderated for a second month. Italy’s composite PMI consequently climbed to its highest point since November 2025, indicating a fourth consecutive month of private-sector growth.
Germany, Europe’s largest economy, showed more tentative signs of stabilization. Its services PMI improved to 49.8 from 48.6, remaining just below the growth threshold. New business increased for the first time in five months, while the decline in employment slowed. The figures suggest that the German services downturn is losing intensity, although renewed increases in operating costs demonstrate that the country remains exposed to volatile energy prices and disrupted supply chains.
France continued to underperform the rest of the currency bloc, with private-sector activity remaining in contraction, albeit at a slower rate. The contrast between France and faster-growing southern European economies illustrates how the eurozone recovery is becoming increasingly fragmented rather than uniformly shared across its largest members.
The July surveys follow stronger-than-expected official growth figures. The economy of the 21 countries using the euro expanded by 0.4 percent during the second quarter, twice the 0.2 percent increase forecast by economists. Spain grew by 0.7 percent, while Germany, France and Italy each expanded by 0.2 percent. Investment in artificial intelligence, public spending and resilient household consumption helped offset the effects of elevated energy costs.
Yet the rebound presents the European Central Bank with a difficult policy calculation. Eurozone inflation increased to 2.9 percent in July from 2.8 percent in June, remaining above the ECB’s 2 percent target. At its July 23 meeting, the central bank kept its deposit rate unchanged at 2.25 percent but warned that the full inflationary impact of the energy shock had yet to emerge. Policymakers said future decisions would depend on incoming data and the extent to which energy costs spread into wages, services and consumer prices.
The combination of improving activity and above-target inflation could strengthen arguments for another interest-rate increase. Higher borrowing costs, however, would place additional pressure on households and companies just as economic confidence is beginning to recover.
Geopolitical developments remain the greatest external threat. Although business expectations rose to a five-month high in July, confidence remained below the levels recorded before the escalation of the Middle East conflict in February. Businesses continue to report concerns about energy availability, shipping routes and possible supply-chain interruptions. S&P Global warned that a renewed rise in oil prices or transportation delays could weaken the emerging recovery before it becomes firmly established.
July’s data therefore offer Europe a measure of cautious optimism rather than evidence of a decisive economic breakthrough. Services are expanding again, employment has stabilized and demand is improving. But with inflation elevated, national performances diverging and geopolitical risks unresolved, the eurozone’s recovery remains vulnerable to forces largely beyond its control.
