Lowering interest rate expectations! Eurozone January composite PMI returns to expansion, German manufacturing PMI exceeds expectations

The Eurozone economy shows signs of recovery at the beginning of the year, but weak demand and rising inflation remain challenges.

Business activity in the German private sector stabilized in January, ending six months of contraction, with growth in the services sector offsetting the continued decline in manufacturing output. The French PMI continued to shrink, but the rate of decline was the slowest since September last year. Traders have reduced expectations for interest rate cuts by the European Central Bank this year, anticipating a reduction of 92 basis points.

On the 24th, S&P Global and Hamburger Commercial Bank (HCOB) released the preliminary January PMI for the Eurozone, Germany, and France.

Eurozone Business Activity Recovers in January, Inflation Rate Hits 21-Month High

In the first month of 2025, private sector business activity in the Eurozone showed new growth. However, due to persistently weak demand, the pace of expansion was only slightly positive. Meanwhile, input costs rose sharply, and the inflation rate hit a 21-month high.

• Eurozone January Services PMI preliminary value 51.4, expected: 51.5, previous value: 51.6.
• Eurozone January Manufacturing PMI preliminary value 46.1, expected: 45.4, previous value: 45.1.
• Eurozone January Composite PMI preliminary value 50.2, expected: 49.7, previous value: 49.6.

The Eurozone Composite PMI rose above the 50.0 threshold in January, indicating the first growth in Eurozone business activity since August 2024. The pace of recovery in Eurozone output is constrained by ongoing weak demand. New orders have declined for the eighth consecutive month, but the decrease was minimal, the smallest since August last year.

Data shows that the overall expansion of business activity is mainly concentrated in the services sector. In January, service sector activity grew for the second consecutive month. Meanwhile, manufacturing output continued to decline. The pace of contraction remains steady but narrowed to the weakest level since May last year.

New export orders have declined for nearly three years, although the drop in January narrowed to the lowest point in six months, the pace of decline remains steady.

In January, input costs accelerated sharply. Inflation has accelerated for the fourth consecutive month, reaching the fastest pace since April 2023. The rise in input prices was also above the series average. Manufacturing input costs rose for the first time in five months, while the increase in service sector input costs was the most significant in nine months.

Output prices rose further as businesses passed higher cost burdens onto customers. The pace of inflation also accelerated compared to December, reaching a five-month high. The increase in charging prices was mainly led by Germany, which saw the fastest rise since February 2024. The inflation rate of output prices in other parts of the Eurozone also accelerated, while France experienced its first decline in sales prices in nearly four years.

Employment has declined for the sixth consecutive month. The number of employees in the services sector recorded the fastest growth in six months. Employment numbers in Germany and France continued to decrease, while other regions in the Eurozone continued to create jobs At the beginning of 2025, business confidence is basically stable, and companies remain optimistic that output will increase in the coming year. However, market sentiment is still weaker than the series average. Optimism in the manufacturing sector has risen to a seven-month high, but confidence in the services sector has declined. Market sentiment in Germany has risen significantly, while French companies' confidence is only slightly above the positive territory. Other regions in the Eurozone show strong optimism.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, stated:

“Ahead of next week's European Central Bank meeting, the news on prices is not encouraging. Cost inflation in the services sector has risen, and European Central Bank President Christine Lagarde has indicated that she will closely monitor this area. Price pressures in manufacturing may be due to the weakening euro and Germany's increase in carbon taxes. In the services sector, it may be due to rising wages.

However, given the state of economic weakness, the European Central Bank may continue its gradual rate cuts in the short term.”

Germany's January Business Activity Stabilizes, Decline in Export Business Reduces

In January, the German economy showed initial signs of recovery. The German Composite PMI Output Index rose from 48.0 in December 2024 to 50.1, essentially in line with the 50 mark, ending six consecutive months below 50.

• Germany's January Manufacturing PMI preliminary value is 44.1, expected 42.7, previous value 42.5.
• Germany's January Services PMI preliminary value is 52.5, expected 51, previous value 51.2.
• Germany's January Composite PMI preliminary value is 50.1, expected 48.3, previous value 48.

After the release of the German PMI, the euro rose 0.8% against the dollar, reaching 1.0493, the highest point since December 18. Traders have reduced expectations for rate cuts by the European Central Bank this year, anticipating 92 basis points.

By sector, the services sector's growth accelerated to the fastest pace since July of last year. The services business activity index climbed from 51.2 to 52.5, the highest level in six months. Meanwhile, the decline in manufacturing output has significantly narrowed compared to December, marking the smallest drop in eight months, but the manufacturing output index remains in the contraction zone.

Demand for German goods and services continues to decline. New business volumes have also decreased, but the decline has narrowed compared to last month. The weakness is primarily concentrated in the manufacturing sector. In January, new export business for German companies continued to decline, but the drop was the smallest in eight months.

The lack of new business has led to a further reduction in the backlog of work in the German private sector, continuing a decline that has lasted for two and a half years. The pace of backlog order consumption remains significant, but it has slowed for the third time in the past four months, marking the slowest rate since mid-2024.

Notably, price pressures in Germany intensified in January. Driven by significant cost increases, the average charges for goods and services rose at the fastest pace in 11 months. Rising fuel prices, increased carbon taxes, and wage increases are the main drivers of the sharp acceleration in input costs in the services sector in January As the decline in manufacturing purchasing prices has significantly narrowed compared to last month, the overall input cost inflation rate has reached its highest level in nearly two years.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, stated:

"After a brief fluctuation in November, service sector businesses have increased activity for the second consecutive month. Manufacturing output is shrinking at the slowest pace since mid-2024, and the situation regarding new orders has also slightly eased.

The highlight of this optimistic shift is a better outlook for future activities, which complements the German DAX index outperforming the US S&P 500 index in January."

French Manufacturing PMI Continues to Shrink, but the Rate of Decline is the Slowest Since September Last Year

At the beginning of 2025, France's composite PMI output index has remained below the 50 mark for the fifth consecutive month. However, the index rose from 47.5 in December to 48.3, marking the highest level in four months, indicating that the pace of contraction in the private sector output has further slowed.

• France's January manufacturing PMI preliminary value is 45.3, expected: 42.5, previous value: 41.9. This is the lowest in 55 months.
• France's January services PMI preliminary value is 48.9, expected: 49.4, previous value: 49.3.
• France's January composite PMI preliminary value is 48.3, expected: 47.7, previous value: 47.5.

After the release of the French PMI, traders' bets on the European Central Bank remained stable, expecting it to reach 94 basis points in 2025.

In January, the narrowing decline in France's private sector business activity was mainly due to manufacturing. Manufacturing output recorded the smallest decline since mid-last year. In contrast, service sector activity saw a slight acceleration in its decline in January.

At the beginning of 2025, new orders for French companies have declined for the eighth consecutive month, but the rate of decline is the slowest since August last year. Some respondents indicated that customer interest has rebounded, and the market environment has also improved relatively. Sales to overseas customers continued to decline, but the declines for manufacturers and service providers have significantly narrowed compared to the previous month.

In January, French companies completed unfinished orders at a slower pace, partly due to improved sales conditions in some economic sectors. Service sector businesses only slightly digested backlogged orders, with progress significantly slowing compared to the average level in 2024.

French companies reported an acceleration in layoffs, with private sector employment declining at the fastest pace in over four years.

Tariq Kamal Chaudhry, an economist at Hamburg Commercial Bank, stated:

"Input prices remain in an inflationary state, although the increase in January was far below the long-term average. In contrast, output prices are shrinking, indicating a severe demand situation.

Political uncertainty, business closures, customer budget cuts, and declining income expectations are among the concerns expressed by participants."