Output surge driven by backlogs, not new demand

Factory output accelerated sharply in July, but the growth came primarily from firms working through order backlogs rather than a genuine pickup in new orders . New orders remained weak, suggesting that the output spike may not be sustained once existing backlogs are exhausted . S&P Global noted that "eurozone factories are enjoying something of a summer growth spurt, with production rising at its fastest rate for four years," but also highlighted the reliance on completing previously placed orders .

Germany vs. France: stark divergence across the eurozone

The July data revealed a deeply uneven manufacturing landscape across the eurozone's largest economies :

• Germany was the engine of the upturn, with its manufacturing sector expanding at its fastest pace in years, buoyed by solid industrial activity. Its final manufacturing PMI held at 52.2, up from 50.3 in June .
• France slipped back into contraction, with its final manufacturing PMI falling, 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 .

The broader composite PMI for the eurozone — covering both manufacturing and services — rose to 51.9 in July from 50.0 in June, returning to growth for the first time in four months and consistent with GDP growing at around 0.3% quarter-on-quarter .

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, according to multiple official sources :

• 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 . Disrupted imports of petrochemicals and other key intermediate goods could lead to shortages in essential inputs .
• 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 basis points 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 European Central Bank faces a difficult balancing act :

• 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" . The full inflationary impact of the energy shock "has yet to play out" .
• A growing majority of economists polled by Reuters expect a second rate hike in September 2026, driven by the renewed energy price surge. All 74 economists in the July 13-16 Reuters poll expected the ECB to hold in July, but a growing majority saw a hike in September . A 20% jump in oil prices following a re-escalation of the Middle East conflict prompted markets to price in two more rate hikes this year .

Bottom line: a fragile and uncertain expansion

The July PMI data signals that the eurozone manufacturing 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 . The ECB itself has warned that uncertainty remains high and that it is closely monitoring the intensity and duration of the energy shock .

Output surge driven by backlogs, not new demand

Factory output accelerated sharply in July, but the growth came primarily from firms working through order backlogs rather than a genuine pickup in new orders . New orders remained weak, suggesting that the output spike may not be sustained once existing backlogs are exhausted . S&P Global noted that "eurozone factories are enjoying something of a summer growth spurt, with production rising at its fastest rate for four years," but also highlighted the reliance on completing previously placed orders .

Germany vs. France: stark divergence across the eurozone

The July data revealed a deeply uneven manufacturing landscape across the eurozone's largest economies :

• Germany was the engine of the upturn, with its manufacturing sector expanding at its fastest pace in years, buoyed by solid industrial activity. Its final manufacturing PMI held at 52.2, up from 50.3 in June .
• France slipped back into contraction, with its final manufacturing PMI falling, 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 .

The broader composite PMI for the eurozone — covering both manufacturing and services — rose to 51.9 in July from 50.0 in June, returning to growth for the first time in four months and consistent with GDP growing at around 0.3% quarter-on-quarter .

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, according to multiple official sources :

• 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 . Disrupted imports of petrochemicals and other key intermediate goods could lead to shortages in essential inputs .
• 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 basis points 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 European Central Bank faces a difficult balancing act :

• 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" . The full inflationary impact of the energy shock "has yet to play out" .
• A growing majority of economists polled by Reuters expect a second rate hike in September 2026, driven by the renewed energy price surge. All 74 economists in the July 13-16 Reuters poll expected the ECB to hold in July, but a growing majority saw a hike in September . A 20% jump in oil prices following a re-escalation of the Middle East conflict prompted markets to price in two more rate hikes this year .

Bottom line: a fragile and uncertain expansion

The July PMI data signals that the eurozone manufacturing 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 . The ECB itself has warned that uncertainty remains high and that it is closely monitoring the intensity and duration of the energy shock .