Eurozone July services sector rise underperforms amid stagnant demand

The eurozone's services sector improvement was milder than anticipated in July, as stagnant demand conditions held back activity growth, according to S&P Global data published on Tuesday.

The Hamburg Commercial Bank eurozone composite purchasing managers' output index climbed to 50.9 points in July from 50.6 in June, underperforming against the July 24 flash reading of 51.0 for July.

The services PMI business activity index meanwhile rose to 51.0 in July, worse than the 51.2 flash reading, from 50.5 in June. It was nevertheless the quickest upturn since March, S&P noted.

Climbing further above the neutral 50-point mark separating growth from contraction, it indicates the pace of activity growth for Spain's service sector accelerated in July.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said: "This could turn out to be a good summer for service providers. In Italy and Spain, business activity rose more sharply in July than in the previous month, while Germany, after several challenging months, has clawed its way back into growth territory. The standout performer is Spain, where the purchasing managers' index jumped by more than three points—pointing to a third quarter that's off to an exceptionally strong start."

He however pointed out that France was the only one of four major eurozone economies where the private sector is contracting, with the downturn deepening.

"One key factor is the government's plan for sweeping budget cuts, which could weigh heavily on economic growth. Speculation is mounting that the administration may face a vote of no confidence, adding to the already high level of uncertainty. While Spain is stepping on the gas, France is firmly on the brakes," de la Rubia said.

Regarding inflation, he said: "Inflation is easing in the eurozone's services sector, increasing the likelihood of one further interest rate cut by the European Central Bank in the second half of the year. Costs are rising at a pace that is the slowest in nine months and below the long-term average. This dovetails with recent data from the ECB's Wage Tracker, which shows a deceleration in wage growth—an essential cost component for service providers—over the past several months."

The services PMI features a panel of 5,000 private sector companies, with responses collected between July 10 and 28.

On Friday, S&P data had shown that the manufacturing index had improved to 49.8 in July, in line with the flash reading, from 49.5 in June.

Further, the manufacturing output index had fallen to 50.6 in July, underperforming against the 50.7 flash reading, from 50.8 in June.

Construction PMI data will be released on Wednesday.