LONDON, July 24 (Reuters) - Euro zone business activity returned to growth in July for the first time in four months, driven by a rebound in new orders, even as high inflation and renewed conflict in the Middle East clouded the outlook, a survey showed on Friday.
The S&P Global Flash Euro zone Composite PMI Output Index rose to 51.9 in July from June's 50.0, its highest reading in five months and far above an expectation in a Reuters poll for a modest rise to 50.3.
A reading above 50.0 signals an expansion
in activity.
"July is seeing a welcome revival of economic activity in the euro zone, but a volatile geopolitical environment means it remains to be seen if the good news can last," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
New orders grew for the first time since February, with the pace of expansion the fastest since April 2023. Export orders, which include intra-euro zone trade, continued to decline, but the rate of decrease was the least pronounced since March 2022.
Both manufacturing and services contributed to the output rebound. Services recovered to a five-month high of 51.6, up from 49.4, snapping three months of contraction and confounding the Reuters poll for another month of declining activity. Manufacturing output growth hit a 52-month high and the headline factory PMI rose to 52.0 from 51.4, above the poll estimate for 51.5.
Germany, the euro zone's largest economy, returned to growth for the first time in four months. France's output continued to fall, though only marginally, a softer decline than in June. The rest of the euro zone posted its strongest expansion in eight months.
Staffing levels rose, marking a shift after months of job shedding. The increase was marginal, as continued cuts in manufacturing employment tempered gains in the services industry.
"After a largely stagnant second quarter, there has been something of a bounce in demand during July which takes the PMI up to a level indicative of GDP growing at a reasonably solid 0.3% quarterly pace," Williamson added.
The rate of overall input cost inflation eased to its lowest since February — at the end of which the Middle East conflict erupted — although pressures remained sharp.
Output price inflation also slowed. The easing may reduce pressure on the European Central Bank, which left its key deposit rate at 2.25% on Thursday. A recent Reuters poll suggested the bank would raise it by 25 basis points in September.
The euro zone economy contracted 0.2% in the first quarter of 2026, weighed down by the impact of the Middle East conflict on energy supplies and inflation. The July PMI data suggests the bloc may be gaining some momentum heading into the second half of the year, though risks remain acute.
(Reporting by Jonathan Cable; Editing by Hugh Lawson)
