Euro-Area Private Sector Activity Rebounds

Euro-area private-sector activity has surged to an eight-month high, driven by robust performance in services and stabilising numbers across most of the region, although overshadowed by a concerning situation in German manufacturing.

According to data released on Thursday by S&P Global, the purchasing managers’ index (PMI) climbed to 48.9 in February, surpassing economists’ predictions of 48.4 and marking the closest approach to the 50 level, indicating expansion, since June. This uptick is primarily attributed to the unexpected halt in the contraction of services after six consecutive months of decline.

However, the manufacturing sector has witnessed a significant setback, with a deepening slowdown surprising analysts, especially with Germany at the forefront. The factory gauge for Germany, the largest economy in the region, plummeted to its lowest level since October, indicating a decline in output coupled with a sharp drop in new orders both domestically and internationally.

Norman Liebke, an economist at Hamburg Commercial Bank, highlighted Germany’s role as a drag on euro-zone growth, contrasting it with France’s stronger recovery in both services and manufacturing sectors. The growing disparity between Germany and the rest of the region underscores concerns about the country’s economic performance, exacerbated by prolonged weakness in its significant manufacturing sector. The German government recently downgraded its growth forecast for 2024 to a mere 0.2% following a contraction in 2023.

Despite these challenges, there is a glimmer of hope for the euro zone’s recovery, particularly evident in the services sector, according to Liebke. He predicts that the currency bloc is poised to expand by 0.8% in 2024.

The European Central Bank (ECB) is banking on its record monetary tightening measures to curb inflation without severely impacting the economy. The region narrowly avoided a recession in the second half of 2023, and the ECB aims to strike a delicate balance between controlling inflationary pressures and fostering economic growth.

As the euro area navigates through these contrasting trends, attention will remain focused on how policymakers respond to the challenges posed by divergent sectoral performances within the region, particularly addressing the persistent weaknesses in German manufacturing while leveraging the resilience of the services sector to drive overall economic recovery.