Eurozone firms see activity lift but barriers to growth persist

There are modest signs of improvement in business activity in the eurozone, according to new data from the Hamburg Commercial Bank (HCOB).

The preliminary Composite PMI, an indicator of economic health, rose from 49.60 in December to 50.20 in January.

A reading above 50 indicates expansion, while a total below this threshold signals a contraction. 

“The kick-off to the new year is mildly encouraging,” said Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

“The private sector is back in cautious growth mode after two months of shrinking. The drag from the manufacturing sector has eased a bit, while the services sector continues to grow moderately,” he added.

The Composite PMI looks at the overall status of the manufacturing and services sectors, although HCOB publishes more PMIs which study sub-categories in more detail.

The Manufacturing PMI for the eurozone was recorded at 46.8 in January, an 8-month high and up from 44.3 in December.

This means manufacturing activity is still in contraction territory, but it dropped at a slower pace.

The Services PMI, meanwhile, came in at 51.4 in January. That’s a 2-month low and down from 51.6 in December.

This means activity in the services sector is expanding – albeit at a slightly slower pace.

“The increase in the Composite PMI from 49.6 in December to 50.2 was better than the consensus forecast of no change and left the index at a five-month high,” said Jack Allen-Reynolds, deputy chief eurozone economist at Capital Economics.

“It’s hard to argue that this was anything than another weak survey as it is consistent with the economy stagnating. The industrial sector remained in a deep downturn…and the services sector continued to expand fairly slowly,” he added.

New orders in the eurozone decreased for the eighth consecutive month in January, and new export orders have now fallen continuously for almost three years. 

Germany and France

In Germany, the eurozone’s largest economy, the Composite PMI came in at a 7-month high of 50.1, up in expansion territory after a reading of 48.0 in December.

The Manufacturing PMI increased slightly – remaining in contraction territory – while the Services PMI improved on the month and remained over the 50 mark.

Manufacturing output shrunk at its slowest rate since mid-2024. Services companies also stopped trimming their staff and increased employment for the first time since June last year. 

France, meanwhile, saw a rise in its Composite PMI and Manufacturing PMI, although the figures remain in contraction territory.

The Services PMI fell on the month and remains in contraction territory.

January’s data suggests that the French economy has shrunk again, with HCOB linking this to the country’s current political crisis.

France has a rising deficit and has so far been unable to pass a permanent spending plan for 2025.

“Despite the slight improvement, there is a lack of clear growth drivers for the eurozone,” said Dr. Klaus Deutsch, Chair of Business at OECD Economic Policy Committee – commenting on Friday’s PMI release.

“Private consumption is only reacting slowly to the latest increases in real wages. Competitiveness remains a key problem in many member states, particularly in Germany. This situation, exacerbated by geopolitical uncertainties and a possible escalation of trade conflicts, makes an export-driven recovery appear unlikely and is also dampening corporate investment activity,” he added.

Price rises for the consumer

When it comes to business costs, a sharp and accelerated rise in input costs was recorded in January, increasing at the fastest rate seen since April 2023.

Manufacturing costs rose for the first time in five months, although the services sector saw a steeper increase, registering its biggest jump in nine months.

These costs were passed on to consumers, with output prices rising the most in Germany. 

The rest of the Eurozone also saw the pace of output price inflation quicken, although selling prices in France decreased for the first time in almost four years.

“All of this puts the ECB in a difficult situation: very weak growth with a somewhat stickier inflation,” said Peter Vanden Houte, chief economist at ING Belgium.

“That said, we still believe that the ECB will continue its gradual easing process (with 25bp rate cuts each meeting), arguing that monetary policy is still restrictive and that inflationary pressures are likely to be only temporary,” he told Euronews.