The Eurozone manufacturing sector recorded its strongest growth in July in almost four and a half years; however, this facade hides a troubling weakness in demand. According to the official release from S&P Global, the Eurozone PMI index rose to 51.9 from 51.4 in June, a three-month high. The manufacturing output index surged even more significantly to 52.9 from 51.7, the highest in 52 months. Meanwhile, new orders increased only slightly, and their growth rate significantly lagged behind that of production itself.
The key mechanics behind this discrepancy are revealed in the release text: companies used the completion of accumulated orders to ramp up production, even as the actual inflow of new business remains sluggish. Eurozone manufacturers sold off inventories in July and continued to cut purchases of raw materials and intermediate goods. The volume of uncompleted orders has been declining for the third consecutive month, with the pace of this decline being the strongest since January. At the same time, factory employment declined again, and purchasing volumes fell for the second month in a row.
The picture among the four largest economies in the bloc turned out to be very uneven. Germany was the best performer among this group, showing one of the strongest indices in over four years. Italy also remained in the growth zone, although the pace has slowed to a four-month low. Spain and France, on the contrary, remain nearly stagnant.
S&P Global's chief business economist, Chris Williamson, provided detailed commentary, balancing optimism and caution. "Eurozone factories are experiencing something like a summer growth spurt, with production growing at the fastest rates in four and a half years. However, there are signs that this good news may be short-lived and the momentum risks fading as autumn approaches," he said. He detailed the regional discrepancies: "Germany, the Netherlands, Austria, and Greece report strong production growth, but output is falling in France and Spain, while Italy shows only modest gains. These discrepancies highlight that a significant part of the region continues to struggle with weak demand, high prices, and delivery delays."
Williamson also directly pointed to the source of risk for the future trajectory. "Although supply chain bottlenecks and related energy price pressures have eased somewhat in the July survey period, stress in supply chains and energy prices remain elevated amid ongoing tensions in the Middle East, which threatens to restrain production and further cool demand in the coming months," he warned. He further identified the main structural problem of the report: "The inflow of new business remains alarmingly weak, meaning that producers have to rely on orders placed in previous months to maintain production growth. As a result, factories continue to cut back on staff amid concerns about potential work shortages in the coming months, underscoring that the manufacturing economy is not as healthy as it may seem based on headline figures."
The only truly encouraging signal from the report was a slight improvement in growth expectations for the next 12 months: business confidence rose to its highest level since February. However, it still lags the long-term average, indicating persistent caution among Eurozone goods producers.
