The eurozone’s private sector unexpectedly expanded in January after two months of contraction, as the struggling manufacturing sector showed slight improvement.
S&P Global’s Composite Purchasing Managers’ Index (PMI) rose to 50.2, a five-month high, from December’s 49.6. This increase pushed the index above the 50-point threshold, signaling growth. Analysts had forecasted a reading of 49.7.
While manufacturers remained in contraction at 46.1, their performance slightly improved. The services sector continued to drive growth, maintaining a stable reading of 51.4.
“The start of the new year is cautiously optimistic — the private sector has shifted back to modest growth,” said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. “Germany played a key role in boosting the eurozone economy, with its composite index returning to expansion.”
The euro gained 0.8% against the dollar, trading at $1.0493. Market expectations for European Central Bank (ECB) interest rate cuts were slightly revised, with traders now pricing in 90 basis points of reductions by year-end, down from over 100 basis points earlier in the week.
Despite the positive PMI figures, a robust recovery for the 20-nation eurozone remains distant. Germany, the region’s largest economy, faces continued challenges after a second consecutive year of declining output. Meanwhile, France is grappling with fiscal constraints and political instability.
Germany’s economic outlook remains subdued. A snap election next month is hoped to catalyze investment in infrastructure, but short-term prospects are grim. The Bundesbank expects stagnation to persist, and Germany’s PMI barely surpassed 50.
According to Handelsblatt, Germany has revised its 2025 GDP growth forecast down to 0.3% from 1.1% and reduced its 2026 projection to just over 1% from 1.6%.
The ECB is expected to deliver its fifth consecutive quarter-point rate cut next week, with more reductions anticipated. However, the potential impact of U.S. trade policies under President Donald Trump looms large. While Trump initially avoided imposing tariffs on Europe, his criticism of the region’s trade practices remains vocal.
Economic outlook and trade risks
Bloomberg Economics notes that the eurozone’s modest PMI rebound suggests the economic impact of Trump’s tariff threats has been limited so far. However, uncertainty persists, and trade tensions could worsen. “Trade concerns add to the reasons the ECB should continue cutting rates — we foresee 100 basis points of easing in 2025,” said David Powell, senior euro-area economist.
ECB officials, speaking at the World Economic Forum in Davos, downplayed the risk of tariffs fueling inflation, expressing confidence that the 2% target would be sustainably met this year.
Nevertheless, price pressures persist. S&P Global’s January survey highlighted the sharpest rise in services sector input costs in nine months, with overall output costs also climbing. De la Rubia linked the rise in services prices to wage increases, which hit their highest growth rate since the euro’s inception in the third quarter of 2024.
Business confidence held steady at the start of 2025, with manufacturers becoming more optimistic and companies anticipating higher output in the year ahead. However, GDP growth slowed in late 2024. Preliminary data for the final quarter, due next week, is expected to show only marginal expansion.
PMIs are closely monitored as early indicators of economic trends, offering insights into shifts in activity. While not a perfect match to quarterly GDP figures, they remain a critical tool for understanding the economy’s trajectory.
Global comparisons
Elsewhere, the UK’s composite PMI rose to 50.9, while the U.S. index, due later on Friday, is expected to remain comfortably above the 50 mark, signaling continued growth. Photo by Avij, Wikimedia commons.