Middle East conflict: Economic activity in the Eurozone stagnates

The economy in the eurozone stagnated in June – triggered by growing concerns that the escalating conflict between Israel and Iran would slow growth and fuel inflation again.

The preliminary composite Purchasing Managers' Index (PMI) for the eurozone—a measure of overall activity in the manufacturing and services sectors—held steady at 50.2 points in June for the second consecutive month. This figure is just above the 50-point growth threshold and below the 50.5 forecast by economists in a Reuters poll.

A slight upturn in German industry—the EU's largest economy and the bloc's industrial heartland—saw the German composite index rise from 48.5 to 50.4 points—its highest level in three months. At the same time, however, the situation in France continued to deteriorate, with its composite index falling from 49.3 to 48.5 points.

Service activity also shrank in both Germany and France, but stagnated on average across the eurozone as a whole.

“The eurozone economy continues to struggle to gain momentum,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, which compiles the index jointly with S&P Global.

"Growth has been minimal for half a year now – service activity is stagnating, and industrial production is growing only moderately," de la Rubia continued. "There are cautious signs of improvement in Germany, but France remains a drag."

Geopolitical tensions

The survey, conducted from June 12 to 19, came at a time of rising geopolitical tensions. The US decision to attack Iranian nuclear facilities over the weekend fueled concerns that the conflict between Israel and Iran could escalate into a full-scale conflagration.

The price of Brent crude oil – the global benchmark – has risen by more than 10 percent to over $77 a barrel since June 13, after a surprise Israeli attack on Iranian military and nuclear facilities triggered the current conflict.

According to calculations by Deutsche Bank, an increase in oil prices of ten dollars per barrel could increase inflation in the eurozone by 0.4 percentage points and dampen GDP growth by 0.25 percentage points by the end of the year.

Analysts also warned that rising energy prices are likely to further complicate the work of the European Central Bank (ECB), which forecast earlier this month that inflation would fall to its target of two percent over the course of the year.

The Dutch bank ING stated on Monday that, given the potential new wave of inflation, a further interest rate cut by the ECB in July is "now clearly off the table." The ECB meeting in September is also "likely to be significantly more contentious than previously expected."

Fears of a further surge in oil prices intensified after the Iranian parliament voted on Sunday to close the Strait of Hormuz, a strategically key strait through which around a fifth of the world's oil and LNG trade passes.

However, the closure, which is facing massive resistance from the US and the EU, still has to be approved by Iran's National Security Council.

Analysts at ING and Deutsche Bank expect a short-term rise in the oil price to as high as $120 per barrel in the event of a closure.

Geopolitical uncertainty caused the euro to fall by 0.45 percent to 1.147 US dollars against the greenback by 1 p.m. Central European Summer Time – the US dollar was thus able to once again demonstrate its function as a "safe haven", which it had recently partially lost after US President Trump's tariff tirade .

European stocks and bonds, however, remained largely stable: The STOXX Europe 600, a broad index of European stocks, fell 0.14 percent. The yield on ten-year German government bonds, the Eurozone's benchmark, briefly rose to 2.55 percent before settling at around 2.53 percent—an increase of 0.01 percentage points from the start of the day.

"It's probably also a sign of our times that a US attack on nuclear facilities didn't immediately lead to panic selling in the financial markets," commented ING. "The world has become so volatile and unpredictable that we've apparently gotten used to it."

(om)