Europe – Macro radar Higher July inflation & decent 2Q growth

Europe – Macro radar Higher July inflation & decent 2Q growth

Fabien Bossy • This week: One for the hawks in the euro area as higher energy prices will lead to an inflation rebound in July and 2Q growth should be broadly resilient. Michel Martinez • Last week: ECB kept rates unchanged as expected. PMIs surprised to the upside though may be somewhat dated if the rebound in energy prices proves durable. Anatoli Annenkov  Charts of the week. At 51.9, the euro area composite PMI is back exactly at its pre-Iran war levels. This isn’t the case for price pressures that are diminishing but are still elevated. While those Sam Cartwright data will vindicates ECB hawks, they are somewhat dated as the recent rebound in energy prices is sure to rekindle worries about activity. On this front, the Bank Lending Survey showed a tightening of credit conditions over the last three months, with the deterioration especially pronounced for housing loans. The glass half-full view is that the tightening of credit conditions is, so far, much slower than in 2022-23 (a period which didn’t feature a European recession by the way).

Euro area: composite PMI activity & prices indexes (pts) Euro area: credit conditions (Bank Lending Survey, z-scores) Activity index Prices index Total Housing loans Loans to firms 2.0 80 activity = output subindex prices = average of input and Activity index back to 1.5 75 output prices subindexes pre-Iran war levels

Tighter credit standards, lower demand

Source: Macrobond, SG Cross Asset Research/Economics

 Last week in monetary policy. Again, eyes were turned east last week as the extension of fighting to the Red Sea led Brent prices to breach the $100 threshold for the first time since May while refined products prices continued to be even more dynamic. Bond yields marched upwards too with the OAT 10-year reaching 4% for the first time since June 2009 (see more on that here: France: what does 4% OAT 10y imply for interest payments). While the ECB kept monetary policy unchanged at its meeting, Lagarde could not do anything but sound rather hawkish in the press conference that followed. We see another hike in September as likely with recent data supporting this thesis (more on that below). Further moves beyond that point will however need to be motivated by strong data especially as evidence of material second-round effects may take time to appear. See more details in our ECB post-mortem: Back to June baseline with next hike in September.

This document contains important disclaimer and disclosure information. Please refer to the back inside cover of this research report.

 Last week in data. Things went relatively well. The quarterly ECB Bank Lending survey unsurprisingly showed some tightening of credit conditions with slightly tighter credit standards and slightly lower demand but moves were measured overall. Confidence indexes for their part all surprised to the upside. The July euro area composite PMI was solidly up from 50.0 to 51.9, exactly back to its pre-war February level and pointing to a decent rate of activity growth at the start of 3Q. The improvement was broad-based with composite PMIs up 1.7pts in Germany, 2.4pts in France and 1.9pts in the rest of the euro area. On the other hand, prices pressure decreased but stayed elevated. The average of input and output prices index in the euro area was decreased from 60.1 to 58.9 compared to a May peak at 63.5 and a 2025 average of 54.4. The July euro area consumer confidence also improved noticeably though remains below pre-Iran war levels. Its z-scores went from -1.2 to -0.9 (vs -0.2 in February and a -1.8 through in April). Finally in France, the Insee business confidence index gained 2pts to 97 (long-run average = 100, standard deviation = 10) which was its 2025 average. One piece of disappointing news was the growth in total wages in the French private sector which slowed further in May to only 1.2% yoy (a rebound is likely in June with the rise in the minimum wages).

Europe economic data heatmap Country Data Period Prior Actual SGf Consensus Revised Growth data Euro area ECB Deposit Facility Rate Euro area ECB Main Refinancing Rate Euro area ECB Marginal Lending…