The eurozone economy concluded 2024 with a slight contraction, driven entirely by a downturn in the manufacturing sector, while the services sector rebounded. The HCOB Eurozone Composite PMI Output Index, a survey of approximately 5,000 private sector companies, registered 49.6 in December, up from 48.3 in November but still below the 50-point threshold indicating growth. Declining new business and subsequent job losses were the primary factors contributing to the overall contraction. While employment reductions were observed across the eurozone, they were concentrated within the manufacturing sector, reaching a four-year low in December. Meanwhile, cost pressures for businesses continued to rise, particularly in the services sector, driven by wage increases. This upward pressure on prices presents a challenge for the European Central Bank (ECB) as it navigates monetary policy decisions.
The ECB faces the difficult task of balancing the need to stimulate economic growth with the persistent issue of high inflation, particularly in the services sector. ECB President Christine Lagarde emphasized the continued concern regarding elevated services inflation, which was further confirmed by the December PMI data showing escalating costs and selling prices. This inflationary environment necessitates a cautious approach to interest rate cuts, according to Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. However, the ECB is under increasing pressure to take more decisive action to support the struggling eurozone economy, with critics arguing that the central bank has been too slow to lower interest rates.
Within the eurozone, a divergent economic landscape emerged. While Germany, France, and Italy, the three largest economies, all experienced contractions in December, Spain and Ireland bucked the trend, registering continued expansion. Spain, in particular, saw its private sector output grow at the fastest pace since March 2023. France lagged behind its larger counterparts, recording the weakest performance among the five major economies with a composite PMI of 47.5. Germany and Italy fared slightly better, with readings of 48 and 49.7, respectively.
France experienced its fourth consecutive month of contracting private sector activity in December, though the decline was less severe than in November. The downturn was primarily attributed to weakening demand from foreign markets. While new orders continued to fall, the pace of decline slowed. The services sector showed signs of recovery, with its PMI rising to 49.3 from a 10-month low of 46.9 in November. However, the manufacturing sector continued to struggle, posting its sharpest contraction since May 2020 with a PMI of 41.9. Employment in France’s services sector decreased marginally, marking the first decline in four years.
Germany’s composite PMI was revised upward to 48 in December, indicating a slower pace of contraction compared to November’s 47.2. The services sector returned to growth after a brief contraction in the previous month, but this positive development was insufficient to offset the significant decline in manufacturing output, which was driven by falling new orders. Overall employment in both sectors continued its downward trend for the seventh consecutive month. Despite the ongoing economic challenges, business expectations in Germany improved slightly, reaching a four-month high.
Italy narrowly avoided a contraction, with its composite PMI at 49.7. While new orders declined for the second consecutive month, the pace of decline moderated in both the manufacturing and services sectors. Employment remained stable overall, with the services sector adding jobs at the fastest rate since July, counteracting job losses in manufacturing. The services sector returned to expansion, registering a PMI of 50.7 in December. Business confidence within the Italian services sector also improved, reflecting a more optimistic outlook for the future.
Spain’s economy outperformed its eurozone counterparts, experiencing its strongest growth in private sector activity in 21 months. Both the services and manufacturing sectors expanded, with the services PMI reaching a robust 57.3 and the manufacturing PMI at 53.3. This strong performance translated into increased employment across the private sector. This positive trend in Spain offered a contrasting picture to the struggles faced by other major economies in the eurozone during the final month of 2024. The divergence in economic performance highlights the varied challenges and opportunities across the eurozone, emphasizing the complex interplay of factors influencing economic activity within the bloc.
