Spain’s services PMI rose to 55.1 in July, surpassing the expected 52.5 and showing growth from June’s 51.9. The Composite PMI also rose to 54.7 from a previous 52.1, indicating strong economic performance in the services sector, especially as summer progresses.
New business growth in Spain was the fastest since February, largely driven by domestic demand. The recent robust GDP growth of 0.7% in the second quarter supports expectations for continued expansion, with both services and manufacturing contributing.
Activity In The Services Sector
Activity in the services sector has notably increased, spurred by effective marketing and improved service quality. Domestic demand outpaces foreign demand as global trade policy uncertainties persist, though a new US–EU trade agreement may temporarily ease some of these concerns.
Increased activity levels have led to higher capacity utilisation, reflected in rising work backlogs and improved employment dynamics. Confidence remains high, suggesting continued hiring, particularly in accommodation and food services, where migration has helped ease labour shortages.
Despite moderated input cost inflation, price pressures in the services sector are still above pre-pandemic levels, with wage growth being a key cost driver. This ongoing wage growth is pushing up output prices in the sector.
Spain As Europes Growth Engine
The strong services data for July confirms Spain remains a key growth engine for Europe. This reinforces the trend we’ve seen where the domestic economy continues to outperform expectations. Therefore, we should consider adding to long positions on the IBEX 35 index through futures or call options in the coming weeks.
Looking back, this outperformance is not new; we saw a similar dynamic in 2024 when the IBEX 35 pushed above the 11,000 mark while other European indices struggled. Recent data suggests this divergence is widening again, making a long Spain versus short Germany equity index spread an attractive trade. This strategy could profit from relative strength even if the broader European market stays flat.
The report’s mention of elevated price pressures, driven by wages, is particularly important for our view on the European Central Bank. This is a familiar story, reminding us of the sticky inflation seen through 2024 that complicated the ECB’s rate-cutting path after its initial move. Traders should be cautious about pricing in any aggressive ECB easing, which should support the Euro.
We see this as a reason to hold a bullish stance on the Euro, especially against the US dollar. While the new trade agreement with the US offers some stability, the underlying strength in parts of the Eurozone economy, like Spain’s latest non-farm payrolls which added 43,955 jobs, could be underestimated. Buying near-term EUR/USD call options offers a defined-risk way to position for potential upside.
