Manufacturing continues to recover, Eurozone's January Composite PMI unexpectedly hits a five-month high

According to Zhitong Finance APP, the eurozone's private sector unexpectedly grew in January after experiencing two months of contraction, as there were signs of slight improvement in the struggling manufacturing sector.

The S&P Global Composite Purchasing Managers' Index (PMI) rose from 49.6 the previous month to 50.2, the highest point in five months, slightly above the neutral threshold of 50, with analysts expecting 49.7.

This result reflects a slight improvement in the manufacturing PMI, which remains in a severe contraction zone at 46.1. The services sector remains a bright spot, with the PMI stabilizing at 51.4.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, stated in a statement on Friday: "The start of the new year is somewhat encouraging— the private sector has returned to a cautious growth mode. Germany has played an important role in improving the eurozone economy, with the composite index rebounding into the expansionary range."

Following the data release, the euro maintained its upward trend against the dollar. Traders reduced bets on an interest rate cut by the European Central Bank, expecting a cut of 90 basis points by the end of the year, down from over 100 basis points earlier this week.

Despite the rise in the PMI index, it seems that the 20-country economy in the region still has a long way to go for meaningful recovery. After a second consecutive year of declining output, the outlook for Germany, the eurozone's largest member, remains bleak. Meanwhile, France is facing fiscal strain and political instability.

There are hopes that next month's early elections could improve Germany's fortunes and pave the way for more infrastructure investment. However, in the short term, the German central bank believes that the recent stagnation trend will continue. The country's PMI index is just slightly above 50.

According to insiders, Germany is expected to lower its GDP growth forecast for 2025 from 1.1% to 0.3%, and its growth expectation for next year from 1.6% to just above 1%.

The market widely expects the European Central Bank to cut rates by 25 basis points for the fifth time next week. If U.S. President Trump’s trade measures do not disrupt this process, further rate cuts are anticipated.

Although Trump did not impose tariffs on Europe in the early days of his return to the White House, he expressed dissatisfaction with the way trade is conducted in the region, stating it is "very bad" for the U.S.

David Powell, senior economist for the eurozone at Bloomberg Economics, stated: "The eurozone composite PMI index has risen for the second consecutive month, indicating that the uncertainty caused by Trump's tariff threats has had little impact on economic activity. However, the situation is far from clear—details of his plans have yet to emerge. Trade issues have increased the rationale for the European Central Bank to continue cutting rates—we expect a 100 basis point cut by 2025." At this week's Davos Forum, European Central Bank officials downplayed the inflation threat posed by any tariffs imposed by Trump and expressed confidence in achieving the sustainable 2% inflation target this year.

However, inflationary pressures have not completely eased. S&P Global's January survey showed that input costs in the services sector experienced the "most significant" increase in nine months. Overall output costs also rose more rapidly at the beginning of 2025.

"The news on prices is not encouraging," de la Rubia said, "In the services sector, this may be due to rising wages, with wage growth in the Eurozone reaching its highest level since the euro's inception in the third quarter of 2024."

S&P Global stated that business confidence remained largely stable at the beginning of 2025, with manufacturers becoming more optimistic and businesses maintaining a positive outlook on production increases over the next year.

However, despite a 0.4% GDP growth in the third quarter of last year, recent data indicates that economic activity has slowed as the year came to a close. Market expectations suggest that the data for the next three months, to be released next week, is likely to show only modest growth