The eurozone's economic activity showed signs of expansion in January, albeit at a moderately slower pace than projected. According to the S&P Global's HCOB Flash Eurozone Composite Purchasing Managers' Index (PMI), the composite PMI was steady at 51.5 this month, slightly lower than the anticipated 51.8 predicted by a Reuters poll. The reading remained above the critical threshold of 50.0 that demarcates expansion from contraction, marking the 13th consecutive month of positive but tepid growth.
Despite this expansion, the dominant services sector experienced a slowdown to a four-month low. Its PMI declined to 51.9 in January from December’s 52.4, falling short of the Reuters forecast of 52.6, signaling a moderate easing in service activity. This slower momentum in services counterbalanced a manufacturing sector that continued contracting; however, the rate of contraction lessened with the manufacturing PMI inching up to 49.4 from 48.8, surpassing the predicted 49.1. The manufacturing output index barely returned to expansion, though new orders within the sector decreased for the third month running.
New business orders in the overall eurozone economy increased but at the weakest pace since September, while new export business contracted at the fastest rate in four months. This points to a broad-based demand weakness across both domestic and international markets. Employment trends reflected this environment, with companies recording job reductions for the first occasion since September, signaling caution in labor market growth within the region.
Inflationary pressures intensified concurrently in January. Input costs surged at their fastest rate since February the previous year, while output prices rose at the sharpest pace in nearly two years, emphasizing mounting cost pressures throughout the supply chain.
Economic commentary from experts indicates a subdued recovery outlook. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, characterized the current rebound as modest, indicating that the low growth in new orders does not signify a significant shift in economic dynamics. He added that the prevailing market data supported steady economic growth expectations for the coming months.
Monetary policy perspectives appear influenced by these developments. Rising price pressures alongside a tempered but persistent expansion suggest that European Central Bank (ECB) officials may be inclined to maintain current interest rates. According to de la Rubia, there is even potential for hawkish ECB members to consider rate increases rather than reductions in the near term.
On a positive note, sentiment indicators showed improvement. Optimism regarding future business activity reached its highest level since May 2024, highlighting a cautiously upbeat outlook amid challenging economic conditions.
The eurozone economy began the year on a less robust footing than expected, influenced by softer growth in services and cautious demand trends. Elevated inflationary pressures pose additional challenges, with significant implications for sectors including financial markets, industrial manufacturing, and consumer services.