Eurozone PMIs show improvement in services, manufacturing remains under pressure

The December HCOB Flash Eurozone Composite PMI rose to 49.5, up from November's 48.3, marking a two-month high but remaining below the 50.0 threshold that separates expansion from contraction. This improvement signals a slower pace of decline in private sector activity as services activity returned to growth with a PMI of 51.4, while manufacturing continued its decline with a PMI of 45.2, unchanged from November. Manufacturing output saw its steepest contraction in a year at 44.5, highlighting persistent challenges in the sector. The divergence between the improving services sector and the struggling manufacturing sector was a notable trend for the month.

Economic growth trends were uneven across the Eurozone. Germany and France, the bloc’s largest economies, remained in contraction, though their rates of decline slightly eased. In contrast, the rest of the Eurozone posted a six-month high in output growth, driven by a solid rebound in services. However, demand conditions remained weak overall, with new orders falling for the seventh consecutive month. Export orders continued to decline, although at a slower pace than previous months, signaling ongoing challenges in external demand.

Employment showed troubling signs as staffing levels fell for the fifth straight month, with the pace of job cuts accelerating to a four-year high. Manufacturing saw significant employment reductions, while services experienced near-stagnation. Germany and France led the declines in workforce numbers, while employment in other Eurozone countries saw modest growth. Backlogs of work also decreased for the 21st consecutive month, reflecting subdued business activity and reduced workloads.

Inflation pressures reaccelerated in December. Input costs rose at the fastest pace in four months, driven by sharp increases in the services sector, while manufacturing input prices saw only marginal declines. Output price inflation also quickened for the third consecutive month, reaching its fastest pace since August, but remaining well below 2022’s peak. Rising wage agreements and cost pass-through in the services sector were key contributors, maintaining elevated inflation in this area.

Supply chain and inventory dynamics in manufacturing painted a challenging picture. Purchasing activity contracted sharply, and inventories of both inputs and finished goods fell at their fastest rates in over three years. However, supply chain disruptions appeared minimal, as supplier delivery times showed only marginal lengthening. These trends suggest manufacturers are actively reducing costs and excess inventories amidst weak demand.

Business sentiment improved slightly from November’s one-year low, with both services and manufacturing reporting increased optimism for the year ahead. However, confidence remained subdued compared to historical averages, especially in Germany and France, where political uncertainties weighed on economic outlooks. Across the Eurozone, companies were cautiously optimistic about higher activity levels in the future.

In summary, the Eurozone’s December PMI data reflect a mixed picture. The services sector provided a glimmer of hope with renewed growth, but manufacturing continued to struggle with sharp output declines and weak demand. Inflationary pressures remain elevated, particularly in services, complicating the European Central Bank’s policy outlook. While overall economic activity remains in contraction, the slight improvement in sentiment and stabilization in certain metrics suggest the potential for gradual recovery in 2024.