(Bloomberg) -- The euro-area’s private sector shrank less than anticipated in December thanks to a bigger-than-expected contribution from the services sector.
S&P Global’s Composite Purchasing Managers’ Index increased to 49.5 from 48.3 the previous month, remaining just below the 50 level that separates growth from contraction. Analysts had estimated the index to be little changed from November.
The downturn in manufacturing, now well into its third year, persisted, but the index for services advanced back above 50 — signaling that hopes for a gradual recovery remain intact.
“While manufacturing is still deep in recession, the rebound in services output is a welcome boost for the overall economy,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said Monday in a statement. “Euro-zone companies were actually slightly more confident than in November that business activity will be higher a year from now than it is today.”
The European Central Bank, though, is worried about the region’s economic prospects, cutting interest rates for the fourth time since June last week. President Christine Lagarde said momentum is fading and risks remain skewed to the downside, citing “greater friction” in global trade.
The ECB also trimmed its outlook for next year’s expansion to 1.1% from 1.3%. And most analysts still see those forecasts as overly optimistic since they don’t account for any impact from the kind of US trade tariffs that President-elect Donald Trump has threatened.
What Bloomberg Economics Says...
“The rise in the headline PMI figure for the euro area is good news, although activity in the monetary union remains muted. The uncertainty created by Donald Trump’s electoral victory is likely to continue weighing on the economy in the start of next year, keeping the ECB lowering interest rates at its next meeting in January.”
—David Powell, senior euro-zone economist. Click here for full REACT
The disappointing performance of late has been down to a “striking” inertia in consumption, according to Lagarde, though she said Monday in a speech that pessimism about real incomes “should dissipate as the high-inflation episode moves further into the rear-view mirror.”
Governing Council member Peter Kazimir said later that Europe’s economic malaise is “largely structural” and “demands solutions that extend beyond the remit of monetary policy,” backing a continuation in the current pace of rate cuts.
Some of Lagarde’s colleagues reckon borrowing costs may need to be lowered below the so-called neutral rate — so policy begins to stimulate the economy. Markets find that scenario plausible, betting that the deposit rate will be at 1.75% by mid-2025, from 3% now.
It’s hoped that a long-anticipated rebound in consumer spending will drive Europe’s economy in the coming quarters as shoppers benefit from rising wages and cooling inflation. Fresh headwinds to confidence have emerged, though, after the fall of governments in Berlin and Paris.
“Germany and France, the euro zone’s two biggest economies, are currently in politically uncertain waters,” de la Rubia said. “This is preventing the necessary reforms from being implemented in the short term to boost growth again and is contributing to the ongoing weakness in both countries. However, this situation also entails upside risks. If future governments manage to chart a clear course, there could still be positive surprises next year.”
Earlier PMIs reports from those two countries surprised to the upside thanks to services, though the composite readings for both remained below 50.
While some ECB officials see a danger that inflation will undershoot the 2% target, de la Rubia said PMI price indicators “are not giving any reassurance” on service-sector price gains fading — a key focus in Frankfurt.
PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.
Elsewhere, the UK’s composite PMI index remained at 50.5, while the US gauge, due later in the day, is expected to remain well above 50.
--With assistance from Mark Evans and Joel Rinneby.
(Updates with Bloomberg Economics, UK PMI.)
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