Eurozone Economy Sees Marginal Growth in January (02.05.2025)

The euro area’s economy returned to growth in January, marking its first expansion since August of the previous year.

However, the pace of recovery remained marginal. A sustained but slower decline in new business inflows signaled that the rebound was fragile, primarily supported by the completion of outstanding orders rather than fresh demand.

Eurozone companies faced increased cost pressures, with input prices rising at the fastest pace since April 2023. Despite this, businesses showed greater optimism about the economic outlook, with growth expectations reaching their highest level since July 2024. This improved sentiment coincided with a near-stabilization in employment levels.

PMI Indicators Signal Modest Recovery

The seasonally adjusted HCOB Eurozone Composite PMI Output Index, which combines the Manufacturing PMI and Services PMI, climbed from 49.6 in December to 50.2 in January, surpassing the critical 50.0 threshold that distinguishes expansion from contraction. This increase marked the first monthly rise in private sector business activity since August.

Growth in January was mainly driven by a slower decline in factory production and a modest rise in services activity.
Spain continued to be the strongest performer in the euro area, though its growth pace moderated compared to late 2024.
Germany showed its best performance since May 2024, with an index reading of 50.5, though its expansion remained marginal.
Italy’s economy was nearly stagnant.
France suffered its fifth contraction in private sector activity.

New Business Inflows Continue to Decline

Despite a decline in new business for the eighth consecutive month, overall output grew at the start of the year. Exports remained a key drag on sales, with external demand falling at a sharper rate than total orders. However, the decline in overall new business was the smallest in the current sequence of contractions, indicating some stabilization.

Growth was largely sustained by work on existing business, as backlogged orders continued to shrink for the 22nd consecutive month.
Manufacturing and services firms focused on completing outstanding tasks rather than generating new orders.

Employment in the Eurozone showed signs of stabilization in January, though workforce numbers edged lower. The job market saw mixed trends across sectors:

Manufacturing continued to shed jobs, contributing to an overall slight decline in employment. Service-sector firms recorded modest hiring, reflecting a positive outlook within the industry.

Business Optimism Strengthens

Eurozone businesses expressed stronger confidence in January, with growth expectations reaching their highest level since July 2024. However, sentiment remained below the long-term average. Notably, manufacturers were more optimistic than service providers for the first time in three years.

Inflationary Pressures Intensify

The January survey data indicated a rise in cost pressures, with input price inflation reaching a 21-month high and exceeding long-term trends.

Both manufacturing and service firms reported higher operating costs, prompting businesses to increase prices more aggressively. Output prices rose at the fastest rate in five months, suggesting firms passed on higher costs to consumers.

Source: SP Global

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