In December, the private sector of the eurozone shrank in smaller volumes compared to initial expectations, which is the result of contributions from the services sector that exceeded forecasts.
In the current month, S&P Global’s Composite Purchasing Managers’ Index (PMI) was fixed at 49.5. It is worth noting that in November the corresponding indicator was 48.3. At the same time, the 50 mark separates growth from contraction.
The increase in the mentioned index is an obvious and unambiguous fact, but at the same time, analysts interviewed by the media noted that the December reading still did not show a significant change compared to the November figure.
The downturn in the eurozone manufacturing industry has been observed for the third year in a row. At the same time, the situation in the local service sector is more favorable in the context of the current state of affairs and more optimistic in terms of likely prospects. In this space, the PMI in December was fixed at above 50. The corresponding reading indicates the realism and viability of a gradual recovery, despite the downward trajectory of the dynamic of manufacturing figures.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said that manufacturing is still in deep recession, but a rebound in the services sector is a welcome boost for the economy as a whole. The expert also noted that companies operating in the eurozone showed a slightly higher level of confidence in December compared to the sentiment observed in the previous month. It is worth clarifying in this case it is meant the degree of confidence that in a year the level of business activity will be higher than the current reading.
At the same time, the prospects for the eurozone are not yet what is perceived by everyone as a kind of unequivocal vision of a more successful future. The European Central Bank shows concern about the tendencies existing within the processes that form the condition of the economic system of the region concerned. Last week, this financial regulator decided to lower the cost of borrowing for the fourth time since June. European Central Bank President Christine Lagarde said momentum is fading and risks remain skewed to the downside. In the relevant context, she also mentioned the increasing friction in the global trade space.
Moreover, the European Central Bank has revised down its economic growth forecast. This financial regulator expects the total gross domestic product (GDP) of the eurozone to increase by 1.1% next year. The previous version of the forecast provided for the growth in the corresponding indicator by 1.3%. At the same time, as noted by the media, most experts characterize the mentioned vision of the economic prospects of 2025 as overly optimistic. Analysts point out that the forecast of the European financial regulator does not take into account any impact of a potential tariff growth on goods imported into the United States. An increase in the corresponding indicator may become one of the measures of the trade policy of the administration of Donald Trump, who won the US presidential election in November and will return to the White House next month. Mr. Trump has repeatedly stated his intention to raise tariffs on imported goods. After winning the election, he confirmed the relevance of the appropriate plans, but in this context mentioned the trade relations of the United States with Canada, Mexico, and China. At the same time, according to experts, the prospect of tariff growth from the US is also relevant for the European Union. The implementation of the corresponding plans of Donald Trump is likely to become a factor in increasing tensions in the global trade space. Also, these measures will have a kind of downward impact on the economies of countries that will be affected by high tariffs. Moreover, experts have repeatedly warned that Washington’s tightening trade policy could trigger an acceleration of inflation in the United States.
Economist David Powell said the rise in the headline PMI figure is good news for the eurozone. At the same time, the expert noted that activity in this currency union continues to be muted. Moreover, David Powell said that the uncertainty surrounding Donald Trump’s victory in the United States presidential election is likely to remain a factor of pressure on the eurozone economy, which will force the European Central Bank to cut interest rates at its meeting in January.
Christine Lagarde believes that the disappointing performance of late has been down to a striking inertia in consumption.
European Central Bank Governing Council member Peter Kazimir stated that the malaise of the eurozone economy is largely structural in nature and demands solutions that extend beyond monetary policy. He is also a proponent of continuing the current pace of interest rate cutting.
Some colleagues of Christine Lagarde suggest that the cost of borrowing may have to be lower below the so-called neutral rate. In their opinion, an appropriate decision is necessary for monetary policy to start stimulating the economy. The markets perceive this scenario as plausible and expect that by the middle of next year the deposit rate, which is currently at 3%, will be 1.75%.
Nowadays, the hope is gradually strengthening that the long-awaited rebound of consumer spending will drive the eurozone economy in the coming quarters. The corresponding expectations are based on assumptions that shoppers will benefit from rising wages and cooling inflation. At the same time, after the fall of the German and French governments, new headwinds have emerged for confidence.
Cyrus de la Rubia stated that the German and French economic systems, which are the largest in the eurozone, are currently in politically uncertain waters. According to the expert, the corresponding state of affairs is an obstacle to carrying out the necessary reforms in the short term to boost economic growth, exacerbating weakness in both mentioned countries. Cyrus de la Rubia also stated that this situation entails upside risks. The expert noted that if the new governments of France and Germany manage to chart a clear course, there may still be positive surprises next year.
PMIs reports from Berlin and Paris also witnessed a positive dynamic in the services sector, although the composite readings remained below 50 in both cases.
Some officials of the European Central Bank see the danger that inflation will not reach the target of this financial regulator of 2%. Cyrus de la Rubia said that PMI price indicators are not giving any reassurance on service-sector price gains fading. It is worth noting separately that this indicator is especially important for the European Central Bank.
The markets are closely watching the PMIs. Relevant information allows markets to identify tendencies and turning points in the economy. It’s worth noting that business survey data reflects the scale of changes in output.
The UK’s Composite PMI index in December was fixed at 50.5. The corresponding figure indicates stagnation in the economic system of the United Kingdom. It is worth noting that economists surveyed by the media predicted that the December UK’s Composite PMI index would be fixed at 50.6.
Private sector companies in the United Kingdom are currently cutting jobs at the fastest pace since the global financial crisis, outside the coronavirus pandemic. The media notes that the relevant tendencies are an early sign of the consequences of the 26 billion pounds ($33 billion) payroll tax hike by Chancellor Rachel Reeves. Business confidence in the United Kingdom has fallen to a two-year low. Companies have been raising prices at the fastest pace in the last nine months.
The pound rose by 0.4% to $1.2672 after the data on the December dynamic of the UK’s Composite PMI index was published. Traders have lowered their bets on easing the monetary policy in the United Kingdom. They currently expect the Bank of England to cut interest rates by 77 basis points by the end of next year.
