What key developments in Eurozone factory activity during July are highlighted by the latest S&P Global Manufacturing PMI data, including the rise in the headline output index to a 4½ year high, the reliance on backlogs rather than new orders, diverging trends between Germany's g

Germany vs. France: stark divergence

• Germany was the engine of the upturn, with its manufacturing sector expanding at its fastest pace in years, buoyed by solid industrial activity .
• France slipped back into contraction, highlighting a deepening divergence between the eurozone's two largest economies .
• Italy's expansion also cooled as new orders stalled, adding to the uneven picture .

Middle East conflict — energy, supply chains, and inflation

The war in the Middle East (including the closure of the Strait of Hormuz) is casting a heavy shadow over the recovery:

• Energy costs: Oil and gas prices have spiked sharply since the conflict began in late February 2026. Refined products like petrol, diesel, and jet fuel rose by 40–45%, significantly outpacing crude oil . Energy price volatility is back to levels last seen in early 2022 .
• Supply chains: Physical disruptions to Gulf energy and non-energy exports are creating new bottlenecks, with the Strait of Hormuz closure disrupting global supply chains .
• Inflation: The ECB's June 2026 Economic Bulletin explicitly states that "the war in the Middle East is generating inflation pressures" . The ECB raised rates by 25 bps in June 2026, and headline inflation is projected at 3.0% for 2026, 2.3% for 2027, and 2.0% for 2028 .

ECB rate path and sustainability of the recovery

• The ECB held rates steady at its July 23 meeting, citing highly volatile energy prices and uncertainty, with energy "well above the levels recorded prior to the conflict" .
• A growing majority of economists polled by Reuters expect a second rate hike in September 2026, driven by the renewed energy price surge .
• The PMI data itself signals the recovery is fragile. Because output growth relies on running down backlogs rather than new orders — and because the Middle East conflict continues to push up costs and disrupt supply — the sustainability of the expansion is highly uncertain .