Eurozone PMIs stabilise as UK services weaken
The June flash PMI data published for both the euro area and the UK show neither economy is expanding, but the eurozone release was marginally more constructive.
The eurozone composite PMI rose to 49.5 from 48.5, beating the 49.2 consensus, while the UK composite slipped to 49.4 from 49.7. Eurozone activity remains weak, but it is stabilising. The UK is moving in the other direction as service demand deteriorates further.
The improvement in the eurozone should not be mistaken for a recovery.
Services activity rose to 48.9 from 47.7, while manufacturing remained in expansion at 51.3. Yet new orders fell for a fourth consecutive month, and employment declined again. Germany remains the main drag, with its composite PMI falling to an 18-month low. Manufacturing also continues to benefit from inventory building ahead of potential supply disruption and higher prices, rather than a broad improvement in final demand.
The more encouraging eurozone signal is inflation. Input costs and output prices both eased as lower energy prices began to feed through.
This reduces the urgency for further ECB tightening, although the Bank will remain alert to supply-chain disruptions and renewed energy-price pressures.
The survey was largely collected before the June 17th US-Iran memorandum, so the final data may reflect further easing of energy and shipping concerns.
The UK release was weaker where it matters most. Services activity fell to 48.7 from 49.3, its lowest level in 41 months. Higher costs, weaker consumer confidence and domestic political uncertainty weighed on demand. Manufacturing output rose to 53.6, but this largely reflects temporary stockpiling by customers concerned about future goods-price increases and supply disruption. Manufacturing new-order growth has already slowed, while total private-sector sales, backlogs, and employment all deteriorated.
This leaves GBPEUR exposed in the near term.
The UK faces a less favourable mix of weak services demand and still-elevated cost pressures, even as price measures eased for a second consecutive month. The euro area remains far from strong, but its activity data have improved at the margin while the UK slowdown has broadened through services.
A more constructive GBP view, as held by some analysts, can still hold if the Burnham transition remains orderly, fiscal continuity is established quickly, and the Chancellor appointment reassures markets. A lower political risk premium would support sterling. However, political stability cannot offset a sustained deterioration in domestic demand. Unless UK services recover quickly, the relative growth signal favours further downside in GBPEUR.