Eurozone PMIs: France in the doldrums as German recovery continues

Composite PMI signals continued – albeit subdued – expansion

We do not yet have figures for other eurozone countries, but the S&P Global press release noted that the rest of the region “posted a solid expansion in output.”

Political dynamics might explain the Franco-German divergence

In France, the composite PMI surprised sharply to the downside, falling deeper into contraction territory at 44.5, down from 47.6 and the lowest since September 2023. This was driven by a nearly 4 point fall in the services PMI, also to 44.5, with the manufacturing PMI picking up slightly from low levels to 45.5. The weakness in France is rather puzzling, and the services print could well be a one-off outlier, as occasionally happens in the PMIs. On the other hand, it could be a sign that – despite the recent passage of the 2025 budget – businesses remain fearful of a government collapse and new snap elections (something we also see a high risk of). In contrast, Germany’s composite PMI edged further into expansion territory at 51.0, up from 50.5. This was driven by a continued stabilisation in the manufacturing PMI which rose to 46.1, up from 45. The comparative strength in Germany vis-à-vis France could reflect the differing political dynamics. While coalition talks are likely to be difficult following Sunday’s election, there is a higher chance of a stable, reform-minded government being formed than in France.

Decline in employment index suggests labour hoarding is coming to an end

The employment sub-index for the eurozone fell back to 49.3, and has now been in contraction territory (albeit modestly) for 7 straight months. While the relationship with the hard data is not exactly lock-step (see below), employment growth has declined, and the recent weakness in the PMI suggests the slowdown in the labour market will continue. This is in line with our view that the eurozone unemployment rate will bottom out and start edging slightly higher later this year, as elevated wage growth and the subdued recovery bring the prolonged period of labour hoarding to an end.

Growth is likely to pick up, but subdued recovery to keep the ECB cutting

Notwithstanding the puzzling weakness in France, the February PMIs suggest the eurozone as a whole continues to recover, helped by a stabilisation in the weak manufacturing sector and a pickup in consumption. In the near-term, some front-loading of exports to the US ahead of tariff rises is also likely to support growth in the first half of 2025. However, in big picture terms we expect the recovery to remain subdued. Our base case continues to see the ECB cutting rates again at the March Governing Council meeting. Beyond that, we have penciled in a pause at the April meeting, driven by trade policy uncertainty and rates at that point being near some neutral estimates. Thereafter, we expect US trade tariffs to drive a renewed slowdown in eurozone growth, pushing the Governing Council to cut further, with the deposit rate expected to reach 1% by early 2026.