Eurozone business activity remained in contraction in June, but the downturn eased from the deeper weakness recorded in May, leaving the currency bloc with a fragile growth picture just as the European Central Bank weighs inflation risks against signs of fading demand.

The S&P Global Flash Eurozone Composite PMI Output Index rose to 49.5 in June from 48.5 in May, reaching a three-month high but remaining below the 50.0 level that separates expansion from contraction. The reading marked the third consecutive monthly fall in private-sector activity, according to provisional survey data released on June 23. The improvement suggests the pace of decline slowed at the end of the second quarter, but it did not show a return to broad-based growth.

The central weakness remained in services, the region’s dominant source of output and employment. The Flash Eurozone Services PMI Business Activity Index rose to 48.9 from 47.7, also a three-month high, but still signaled shrinking activity. Manufacturing output continued to grow modestly, though the Flash Eurozone Manufacturing Output Index slipped to 51.2 from 51.3, while the headline Manufacturing PMI fell to 51.3 from 51.6, a four-month low.

The split between services and manufacturing is central to the macroeconomic significance of the report. Manufacturing has been supported in part by inventory building as customers and companies try to protect themselves against possible price increases and supply disruptions. Services, by contrast, remain more exposed to domestic demand, consumer spending, travel conditions, labor costs and business confidence. As long as services remain below the 50 threshold, the broader economy is unlikely to generate strong momentum.

Reuters reported that eurozone private-sector activity shrank for a third straight month in June as a modest recovery in tourism and leisure demand failed to fully offset a continued fall in new business. The report cited the composite PMI’s rise to 49.5 and noted that new orders declined for a fourth consecutive month across the bloc, even though the pace of decline slowed. A marginal recovery in manufacturing new orders was not enough to offset continuing weakness in services demand.

The PMI release also showed that the region’s two largest economies remained under pressure. Germany’s private sector contracted at the fastest pace in 18 months as its services downturn deepened, while France’s contraction eased as declines in manufacturing and services output both slowed. Outside those two economies, the rest of the euro area recorded modest growth, giving the regional data a mixed profile rather than a uniform deterioration.

The German signal is particularly important because weakness in Europe’s largest economy can weigh on regional trade, investment and confidence. A deeper German services downturn indicates that the drag is no longer confined to the factory sector or to export-sensitive industries. France’s milder contraction provides some offset, but the survey does not yet point to a synchronized eurozone rebound.

The demand indicators remained soft. S&P Global said new business decreased for a fourth consecutive month, though at the slowest pace since March. Manufacturing new orders returned to marginal growth, but the service sector continued to report falling new work. That pattern suggests that some companies may be rebuilding supply buffers while end-user demand remains hesitant.

Employment data were also subdued. The eurozone private sector recorded another slight decline in headcount in June. Services staffing rose marginally, but manufacturing payrolls continued to fall, leaving overall employment near stabilization rather than recovery. S&P Global said the private sector has failed to register jobs growth for six consecutive months, a sign that companies remain cautious about the demand outlook.

The labor-market detail matters for the ECB because employment resilience has been one of the main supports for household income and services demand in recent years. A sharp deterioration in jobs would deepen downside growth risks and could reduce wage pressure over time. The June PMI does not show that kind of break, but it does show that firms are not yet confident enough to expand payrolls across the economy.

For policymakers, the inflation components may be the most consequential part of the release. Input costs continued to rise in June, but the rate of increase slowed to the weakest pace since February, before the outbreak of the Middle East war. Output prices also increased at a slower rate, reaching the weakest pace in three months, although the moderation in selling prices was less pronounced than the easing in input costs.

The inflation signal gives the ECB some evidence that the recent price spike may be losing intensity. S&P Global said lower energy prices were already filtering through to businesses and that input-cost and selling-price inflation had moved lower. Reuters reported that input costs rose at their slowest pace since just before the Middle East war began, with easing across both manufacturing and services.

The timing of the survey is relevant. S&P Global said the June flash data were collected between June 11 and June 19 and that most responses used in the calculation were received before the June 17 memorandum of understanding for a cessation of hostilities between the United States and Iran. That means the PMI captures business conditions during a period still heavily shaped by supply concerns and war-related energy uncertainty, but not necessarily the full effect of any subsequent easing in geopolitical risk.

The ECB raised its three key interest rates by 25 basis points at its June 11 meeting, citing inflation pressures from the Middle East war and its commitment to returning inflation to the 2% target over the medium term. In its June policy statement, the central bank said headline inflation was expected to average 3.0% in 2026, 2.3% in 2027 and 2.0% in 2028, with inflation excluding energy and food projected at 2.5% in both 2026 and 2027 and 2.2% in 2028.

The June PMI does not remove the inflation problem, but it changes the balance of risks. If price pressures continue to soften while services demand remains in contraction, policymakers may face a stronger argument for pausing after the June move. If energy prices rise again or output prices prove sticky, the ECB could still decide that restrictive policy is needed for longer. The report therefore supports a data-dependent approach rather than a single directional policy conclusion.

The ECB has already emphasized that its decisions will be made meeting by meeting. That language is important because the central bank is dealing with a supply shock that can push prices higher while also weakening growth. Traditional demand-management tools are less precise in that environment: higher rates can restrain inflation expectations and demand, but they cannot directly expand energy supply or repair disrupted trade routes.

The PMI’s manufacturing details show the complexity of the shock. Manufacturing output remained in expansion, but part of the support came from inventory building and efforts to secure inputs ahead of possible price increases or supply problems. Suppliers’ delivery times remained lengthened, although the deterioration was less severe than earlier in the year. Purchasing activity was broadly unchanged, ending a three-month period of expansion that had followed the start of the conflict.

That pattern may not represent durable industrial strength. If manufacturers are bringing forward orders to manage supply risk, output can look firmer in the short term even while underlying final demand remains weak. Once inventories are rebuilt, production could slow unless new orders from customers improve. The June PMI’s continued decline in total new business therefore limits the positive interpretation of manufacturing resilience.

Business expectations improved for a second straight month after falling to a 31-month low in April, but sentiment remained relatively muted. Confidence rose in both manufacturing and services, with stronger optimism in France and the rest of the euro area offsetting a slight drop in Germany. The improvement suggests companies see less severe disruption ahead, but it does not yet imply a strong rebound in output or hiring.

For financial markets, the report points to a eurozone economy that may be avoiding a sharper contraction but is still struggling to generate growth. Bond investors are likely to focus on the combination of weaker activity and cooling cost pressures, which could reduce expectations for an extended ECB tightening cycle. Currency and equity investors may take a more cautious view because services weakness is a direct warning on domestic demand and corporate revenue momentum.

The data also arrive as global investors are comparing regional growth paths. The eurozone’s composite PMI remained below 50, while manufacturing provided only partial offset to services weakness. That leaves the region exposed to further shocks in energy prices, external demand or confidence. A sustained recovery would likely require services to return to expansion, new orders to stabilize, and employment to move from near-stagnation back to growth.

The near-term economic read-through is that the second quarter was weak. Reuters noted that a poll published at the start of June had pointed to a 0.1% expansion in the eurozone economy for the quarter. S&P Global’s chief business economist said the flash PMI was consistent with unchanged GDP over the second quarter, implying that the bloc may have avoided a technical recession but with little underlying momentum.

The final June manufacturing data are due on July 1, with services and composite indicators due on July 3. Those releases will show whether the flash estimates are confirmed and whether the services downturn is easing enough to stabilize the broader economy. Until then, the June report leaves the eurozone in a narrow corridor: contraction is less severe, inflation pressure is moderating, but services remain too weak to support a confident growth call.