Manufacturing stockpiling offsets services weakness in June flash PMIs, as US-Iran peace deal fuels cautious optimism
Flash PMI data for June showed advanced economies stuck in low gear, with war-driven front-loading of orders boosting factories just as consumer-facing services retreat under cost pressures.
Factory demand gets a temporary lift
Factories across the US, UK and euro zone reported stronger output or orders in June, but the gains were widely attributed to businesses building safety stocks ahead of feared shortages and price rises. US manufacturing PMI rose to 55.7, a reading last seen in May 2022, while euro zone factory output continued to expand even as the headline PMI dipped to 51.3. UK manufacturers flagged a “temporary uptick” from stockpiling, though new orders softened to a six-month low.
A disappointing June 'flash' PMI indicates that the economy contracted for a second successive month, albeit at only a 0.1 per cent rate and merely flat-lining over the second quarter as a whole.
Services buckle under cost pressures
The services sector painted a different picture. UK services PMI slumped to 48.7, its weakest in three years, while the euro zone reading remained in contraction at 48.9. US services eked out a small gain to 51.3, helped partly by the FIFA World Cup, but overall private-sector employment was subdued for a second month. Factory job cuts in the US hit a six-year low of 47.0, which S&P Global linked to “concerns over the sustainability of the recent upturn in demand alongside worries over the escalating cost of raw materials.”
- US-Israeli war with Iran begins, Strait of Hormuz disrupted
- ECB raises interest rates as war-related energy costs push inflation over 3%
- US and Iran sign interim ceasefire memorandum
- June flash PMIs released: US composite 52.2, UK 49.4, euro zone 49.5
- BOJ tankan expected to show large manufacturer DI falling from +17 to +15
Oil slide and peace deal provide some relief
Brent crude settled at $77.08 a barrel on Tuesday, the lowest since the eve of the US-Israeli war with Iran on 27 February. The drop followed the 17 June ceasefire memorandum between Washington and Tehran. Vice President JD Vance said talks in Switzerland had laid a “good foundation” for a final deal, though tensions over the Strait of Hormuz and Lebanon persist.
Many businesses have feared since February that the sudden closure of the Strait of Hormuz would trigger supply chain disruptions later this year, and so placed orders with manufacturers early.
Central banks watch the inflation pulse
The European Central Bank raised interest rates on 11 June after war-related energy costs pushed overall inflation above 3%. Input cost inflation eased in June, however, with Chris Williamson noting “lower energy prices are already filtering through to businesses.” The Bank of Japan’s forthcoming tankan survey is expected to show large manufacturer sentiment slipping from +17 to +15, hurt by the same commodities price surge.
- United States
- 52.2 index
- United Kingdom
- 49.4 index
- Euro zone
- 49.5 index
An uncertain second half
Economists questioned whether the manufacturing boost could last. Veronica Clark of Citigroup said domestic production of AI-related goods was rising and would “likely continue to boost total manufacturing activity in coming months,” but front-loaded orders could unwind if peace holds and supply chains normalise. UK economist Thomas Pugh warned that growth was unlikely to “pick up much through the rest of the year,” even if a swift political transition avoids prolonged uncertainty.
