After economic stagnation in 2023, the EU economy seemed to be recovering well in the first quarter of this year.

But less encouraging data from the EU manufacturing sector in the second quarter has since dampened expectations of a swift rebound and led to more soul searching about the global competitiveness of EU industry.

According to Eurostat, seasonally adjusted GDP increased by 0.3% in the EU in the first quarter of 2024 compared with the previous quarter. Compared with the same quarter of the previous year, seasonally adjusted GDP increased by 0.6% in the EU in the first quarter of 2024.

However, manufacturing in Europe’s industrial heartland has continued to weaken this year. Eurostat's industrial production index for the eurozone remains below its 2021 level and it is currently trending lower. S&P Global’s eurozone manufacturing purchasing managers index (PMI), a rough real-time proxy for activity in the sector, fell to a seven-month low of 45.6 in July.

In Germany the indicator came in at 42.6, a three-month low, while in France it fell for a second straight month to 44.1. Anything under 50 is contractionary territory.

As for construction, the HCOB Eurozone Construction PMI dropped to 41.8 in June from 42.9 in May, signalling a marked contraction in output across the sector.

Construction production levels continued to fall across all three of the major eurozone countries in June.

German firms faced the greatest slump in performance, despite the contraction in output easing to the least marked since August 2023. At the same time, faster reductions were observed in the French and Italian construction sectors, with the former seeing its sharpest fall in output since March, and the latter posting its strongest drop in nearly two years.

S&P’s composite PMI, which includes services, stayed just above 50 in July, despite slowing from June. Overall, the signs are that the EU’s economic development is increasingly reliant on services while the situation of industry remains gloomy.

The numbers underline the challenge faced by EU policy makers in maintaining Europe’s competitiveness in the global marketplace. The newly re-elected chief of the European Commission, Ursula von der Leyen, put restoring competitiveness front and centre in her political priorities for her next mandate, while European Central Bank President Christine Lagarde said in mid-July that Europe’s competitive position vis-à-vis China is set to have a growing influence on the Bank’s thinking.

A long-awaited report by former ECB president Mario Draghi, now due in September, is expected to provide more detail, and help set the EU’s economic agenda in the next few years. In a recent speech in Spain, Draghi underscored the importance of cheaper energy and innovation as drivers of economic growth and increased productivity.

He also noted that “successive layers of regulation have created a burden on long-term investment”. While stating that “we don’t want to become protectionist in Europe”, he went on to suggest that “we cannot be passive if the actions of others are threatening our prosperity” and appeared to allow greater scope for state-driven investment and trade protection measures.