The euro zone’s business activity downturn showed signs of easing in December as the services sector returned to growth, counterbalancing the ongoing contraction in manufacturing, according to a recent survey by HCOB.
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The preliminary composite Purchasing Managers’ Index (PMI) for the euro zone, compiled by S&P Global, rose to 49.5 in December from 48.3 in November. Although still below the 50 mark that separates growth from contraction, the improvement exceeded Reuters poll expectations of a drop to 48.2.
Services Sector Rebounds, Manufacturing Still Contracting
Despite the overall improvement, economic concerns remain. Capital Economics’ Jack Allen-Reynolds noted that the PMI indicates a contracting economy, echoing other evidence of poor economic performance. Germany, the euro zone’s largest economy, saw a slight easing in its economic downturn, but business activity still contracted for the sixth consecutive month. France experienced a similar trend with a slower pace of contraction in its services sector.
The European Central Bank recently implemented its fourth interest rate cut this year, signaling potential for further easing as the euro zone grapples with political instability and the threat of renewed trade wars. Meanwhile, businesses in the UK, now outside the European Union, are experiencing rapid staff reductions, price increases, and growing pessimism due to new government tax policies.
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A key driver of the improved PMI was the rebound in the euro zone services sector index, rising to 51.4 from 49.5, surpassing expectations of no change. However, with the services employment index dipping slightly to 50.1 from 51.0, firms appear hesitant about significant near-term improvements.
The manufacturing PMI remained below the 50 threshold for growth, holding steady at 45.2, slightly below the predicted 45.3. The output index, a component of the composite PMI, further declined to 44.5 from 45.1. Oxford Economics’ Paolo Grignani highlighted the persistent manufacturing crisis, noting the production sub-index at a one-year low despite the stable headline index.
Weak Demand and Future Outlook
New orders for manufactured goods continued to decline, with the index slipping to 43.0 from 43.4, suggesting a prolonged period of weakness.
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Despite the current challenges, overall optimism has risen, with the composite future outlook index reaching a four-month high of 57.8 from 56.1. This suggests a potential for future economic recovery, although the timing and extent remain uncertain.
In conclusion, the December PMI data paints a mixed picture for the euro zone economy. While the services sector rebound offers a positive sign, the persistent contraction in manufacturing and ongoing economic uncertainty highlight the challenges facing the bloc. The improved future outlook index suggests a glimmer of hope for eventual recovery.
