A survey published on Friday showed that eurozone business activity returned to growth in July for the first time in four months, driven by a rebound in new orders, despite persistent inflationary pressures and renewed conflict in the Middle East, casting uncertainty over the economic recovery outlook.

The eurozone composite output index from S&P Global rose to 51.9 points in July, compared to 50 points in June, marking its highest level in five months and significantly exceeding Reuters poll expectations of a limited rise to 50.3 points.

Any reading above 50 points indicates economic expansion, while a reading below that level reflects contraction.

Chris Williamson, chief economist at S&P Global Market Intelligence, said: 'July sees a welcome rebound in eurozone economic activity, but the volatile geopolitical environment makes it uncertain whether this improvement will be sustained.'

New orders rose for the first time since February, recording the fastest pace of growth since April 2023. Although export orders, including intra-eurozone trade, continued to decline, the rate of decline was the mildest since March 2022.

Both the manufacturing and services sectors contributed to the recovery in output. Services activity rose to a five-month high of 51.6 points, compared to 49.4 points in June, ending three consecutive months of contraction and beating Reuters expectations of a continued decline.

Manufacturing output also recorded its strongest growth in over four years, with the manufacturing PMI rising to 52 points in July from 51.4 points in June, exceeding the poll forecast of 51.5 points.

Germany, the eurozone's largest economy, returned to growth for the first time in four months, while the French economy continued to contract, albeit at a milder pace compared to June. The rest of the eurozone economies recorded their strongest growth in eight months.

Employment levels rose, marking a shift after months of job cuts, but the increase remained limited as ongoing reductions in manufacturing curbed employment gains in the services sector.

Williamson said: 'After a notable hiatus during the second quarter, demand saw a modest rebound in July, pushing the PMI to a level consistent with GDP growing at a relatively strong quarterly rate of 0.3%.'

Input cost inflation fell to its lowest level since February, the month following the outbreak of the Middle East conflict, despite persistently high inflationary pressures. Output price inflation also slowed.

This decline in price pressures may give the European Central Bank more room to move, after it kept its main deposit rate at 2.25% on Thursday. A recent Reuters poll suggests the bank may raise rates by 25 basis points in September.

The eurozone economy contracted by 0.2% in the first quarter of 2026, impacted by the repercussions of the Middle East conflict on energy supplies and inflation. July's PMI data suggests the region may regain some momentum as it enters the second half of the year, despite continued risks.

Germany returns to growth

The German private sector returned to growth in July for the first time in four months, driven by a strong rebound in manufacturing output, although the renewed conflict in the Middle East raises doubts about the sustainability of this improvement.

Germany's flash composite PMI from S&P Global rose to 51.2 points in July, compared to 49.5 points in the final reading for June, beating analysts' expectations in a Reuters poll of 49.8 points.

Phil Smith, associate director of economics at S&P Global Market Intelligence, said: 'The German economy has seen a positive start to the third quarter, with the composite PMI returning to growth after three months of contraction following the outbreak of war in the Middle East.'

He added that the escalation of hostilities in the region, and the resulting additional pressure on global energy prices, makes the path to a sustainable recovery unclear.

The flash manufacturing PMI rose to 52.2 points in July from 50.3 points in the previous month, beating analysts' expectations of 50.5 points.

Smith said: 'The manufacturing sector saw a record growth in output in July, recording the strongest rise in production in around four and a half years.'

In contrast, services sector activity remained below the 50-point mark, despite improving to 49.6 points from 48.6 points, its highest level in four months.

New business rose for the first time since February, supported by a slight improvement in services demand and accelerating growth in manufacturing orders.

Employment fell again, but at the slowest pace since December, while business confidence rose to its highest level in five months.

Input cost inflation also rose from a four-month low in June, driven by the services sector, partly due to the end of the government's temporary fuel tax cut.

Smith said: 'With oil prices rising again, we may be on the cusp of a new period of inflationary pressures.'

French private sector contraction eases

The contraction in the French private sector eased in July, with a slight improvement in services activity, despite ongoing concerns about inflation, borrowing costs, and geopolitical tensions amid escalating conflict in the Middle East.

France's flash composite output index from S&P Global rose to 49.6 points in July, compared to 47.2 points in June, surpassing Reuters poll expectations of 47.8 points.

The French flash manufacturing PMI fell to 50.0 points in July from 51.2 points in June, compared to the Reuters expectation of 51 points.

In contrast, the services PMI rose to 49.8 points from 46.8 points in June, surpassing the Reuters expectation of 47.5 points.

The National Institute of Statistics and Economic Studies (INSEE) announced on Thursday that French business confidence rose to its highest level in four months in July, despite the recent escalation in the US-Israeli conflict with Iran.

But Joe Hayes, chief economist at S&P Global Market Intelligence, said the economic uncertainty associated with the Iranian conflict would continue to weigh on the economy.

He added: 'Although the latest survey data brought some positive news, including a rise in the French PMI from its May lows and a decline in inflationary pressures, relying on the continuation of this momentum seems overly optimistic, given the renewed pressures on oil and gas markets in recent days.'