FX.co ★ Eurozone Private Sector Grows In January

In January, the eurozone's private sector reported a return to growth, attributed to a deceleration in the decline of manufacturing activity and a continued, albeit slower, expansion in the services sector, according to the latest purchasing managers' survey conducted by S&P Global.

The HCOB composite Purchasing Managers' Index (PMI), an aggregate measure of both manufacturing and services activities, increased to 50.2, marking its highest level in five months, up from 49.6 in December. This surpassed economists’ expectations of a modest rise to 49.7. A PMI above 50 denotes growth within the private sector.

The manufacturing PMI reached an eight-month high, climbing to 46.1 from December’s 45.1, yet still reflected contraction. Economic forecasts had anticipated a slightly lower index of 45.6. Meanwhile, the services sector's PMI dropped to a two-month low of 51.4 from the previous 51.6, contrary to predictions of stability.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, commented, "The start of the new year shows moderate optimism. The private sector is tentatively edging back into growth after two months of contraction. The pressure from manufacturing has lessened somewhat, while services maintain moderate growth."

The survey also indicated almost stabilized employment levels in the private sector despite subdued demand. Inflationary pressures were pronounced, with input costs surging and inflation reaching its highest point in 21 months. Businesses have responded by significantly increasing selling prices to offset these cost pressures.

De la Rubia remarked, "In anticipation of the ECB meeting next week, the inflation data presents challenges." He linked the heightened price pressures in manufacturing to the weaker euro and Germany's elevated CO2 tax, while attributing the service sector’s price increases largely to wage hikes, which have risen in the eurozone at the fastest pace since the euro's introduction.

Despite the economic fragility, de la Rubia predicted the European Central Bank (ECB) would likely maintain its gradual approach to reducing interest rates for the time being. The next ECB policy announcement is slated for January 30, with an expected 25 basis points cut in interest rates.

Surveys for Germany and France, released concurrently, showed signs of improvement. In Germany, the largest economy in the euro area, business activity stabilized at year's start, halting a six-month decline. The German manufacturing PMI rose to an eight-month peak of 44.1 from 42.5, exceeding forecasts of 42.7, although it remains in contraction. The services PMI increased to 52.5 from 51.2, outperforming expectations of 51.1.

As a result, Germany’s composite index rose to 50.1, a seven-month high, signaling stagnation rather than decline, surpassing the anticipated improvement to 48.2.

In France, the manufacturing PMI increased to a seven-month high of 45.3 from 41.9 in December, exceeding expectations of 42.4, yet activity continued to decrease. The services PMI fell to a two-month low of 48.9, contrary to forecasts of stability.

France's composite PMI rose to 48.3, a four-month high, outperforming the anticipated 47.7.