Fragile Euro Zone Economy at Year-End 2024

LONDON (Reuters) – The euro zone economy ended 2024 in a fragile state. A survey showed overall activity contracted for a second consecutive month in December, as a modest recovery in the services industry failed to offset a deeper downturn in manufacturing.

HCOB’s final composite Purchasing Managers’ Index (PMI) for the bloc, compiled by S&P Global and viewed as a strong indicator of overall economic health, rose to 49.6 in December from November’s 48.3. This was just above a 49.5 preliminary estimate but still below the critical 50 mark that separates growth from contraction. Due to the holiday season, the data collection occurred earlier than usual, with the survey conducted from December 5 to 18.

The decline in the headline index was softened by the services sector, whose PMI rebounded above breakeven to 51.6 from November’s 49.5, but it was negatively impacted by a sharper drop in factory activity.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, remarked, “December PMI data doesn’t exactly lay a fantastic foundation for a service sector boom in 2025, but at least incoming business has stopped falling and the decline in order backlogs has softened.” He highlighted that service providers are fortunate not to be directly impacted by potential U.S. tariffs and should help mitigate the effects of industrial weaknesses on the overall economy in 2025.

U.S. President-elect Donald Trump, returning to the White House later this month, has pledged to impose tariffs on various goods.

An index measuring new services business, seen as a proxy for demand, returned to growth after three months of decline, increasing to 50.2 from 48.1 in November. This occurred despite an increase in overall prices charged as firms attempted to recover from rising input costs. The composite output prices index climbed to a four-month high of 52.5 from 51.9.

De la Rubia commented on the ECB’s stance: “At the December ECB press conference, President Lagarde reiterated that services inflation is still too high. December’s PMI survey for the services sector confirms this.”

For monetary policy, he noted that the central bank should remain cautious, making only minor interest rate cuts in the first quarter of 2025.

The European Central Bank cut interest rates for the fourth time in December, keeping the door open to further easing as the euro zone economy grapples with political instability at home and the looming threat of a U.S. trade war. A Reuters poll expects at least 100 basis points more in cuts this year.