Eurozone services rebound in December, but political woes linger

Eurozone services rebounded in December, lifting overall activity despite a manufacturing slump and job cuts. Germany and France remain in contraction, weighed by political uncertainty. Inflationary pressures persist, keeping the ECB’s interest rate path uncertain.

The eurozone’s private sector ended 2024 on a mixed note, with December’s data showing a surprising revival in the services sector amid a persistent manufacturing slump and simmering political uncertainty.

The rebound offered a glimmer of hope for growth-starved economies, yet dark clouds remain over Germany and France.

Services bounce back, but manufacturing struggles

The eurozone’s Composite PMI rose to 49.5 in December, up from 48.3 in November, exceeding the forecast of 48.2, according to flash data from S&P Global. While the reading remained below the 50-mark, signalling contraction, the pace of decline moderated.

Crucially, the services sector returned to growth, with the PMI jumping to 51.4 from November’s 49.5. It marked a sharp recovery after the first contraction in 10 months. Manufacturing, however, continued its nosedive, recording its 21st consecutive monthly decline – the most significant in a year.

“While manufacturing is still deep in recession, the rebound in services output is a welcome boost for the overall economy,” said Dr Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank.

Yet the uptick in services output contrasts sharply with sluggish new orders and job cuts, which accelerated at the fastest pace in four years. Businesses are responding to weak workloads by trimming staffing, raising fresh concerns about the labour market’s resilience heading into 2024.

Price pressures resurface

Inflation reared its head again in December, with input costs and output prices rising at quicker paces for the third consecutive month. Higher wage agreements contributed to the pressure, prompting businesses to pass on costs to consumers.

“The PMI price indicators are not giving any reassurance here – input costs rose at a faster pace, and selling prices followed suit,” de la Rubia said. The European Central Bank’s cautious 25 basis point rate cut appears justified as inflationary concerns linger, according to the economist.

Germany and France: Growth pains and political paralysis

Germany and France, the eurozone’s largest economies, continued to weigh on overall performance in December. Both countries saw business activity contract, albeit at slightly slower rates.

In Germany, the services sector showed tentative signs of stabilisation, supported by rising real wages that could spur consumer spending.

“We are inclined to expect a recovery in the German services sector, buoyed by improved sentiment over future activity and the upcoming snap elections in February, which should bring more political clarity,” said de la Rubia.

The manufacturing sector, however, remains entrenched in recession, leaving Germany’s economic recovery uncertain.

France fared no better. Dr Tariq Kamal Chaudry highlighted the ongoing struggles in French manufacturing, describing it as the economy’s “Achilles heel”. The manufacturing PMI languished below 50 as “a significant lack of orders from both domestic and international markets” continued to bite, with employment suffering as a result.

France’s service sector also remained under pressure, lacking growth momentum outside of a brief summer boost from the Paris Olympics. “Political uncertainty is a hindrance to business”, service sector companies reported, compounding the economic malaise.

Markets shrug off PMI data

Financial markets were largely unfazed by the PMI release. The euro remained steady, with the euro-dollar exchange rate hovering at 1.0510. Eurozone bond yields also held firm – the rate-sensitive German 2-year Schatz yield stayed flat at 2.05%, while Bund yields were unchanged at 2.25%.

Equities, however, showed some strain. The Euro STOXX 50 and Euro STOXX 600 fell 0.3% and 0.2%, respectively, while France’s CAC 40 underperformed, dropping 0.6%. The sell-off followed Moody’s decision to downgrade France’s credit rating from Aa2 to Aa3 on concerns over deteriorating public finances amid persistent political instability.

Despite the downgrade, European banks proved resilient. The Euro STOXX Banks index climbed 0.5%, with Commerzbank and Deutsche Bank among the top gainers, up 1.3% and 1%, respectively. France’s BNP Paribas rose 0.4%, while Société Générale and Crédit Agricole remained flat.

Looking ahead

The rebound in services activity offers a silver lining for the eurozone economy, but significant hurdles remain. Political uncertainty, particularly in Germany and France, is stalling reforms needed to reignite growth. Meanwhile, manufacturing woes and inflationary pressures threaten to keep the economy under strain heading into the new year.

For now, eurozone watchers may take solace in services momentum, but the road to recovery appears anything but smooth.