Eurozone - PMIs stabilise on services despite political uncertainty

In the final month of 2024 the contraction in business activity in the eurozone eased on the back of rising activity in the services sector. Consensus and our expectations were for a small deterioration in the composite PMI. The rise came against the backdrop of political uncertainty in France, which was flagged by survey respondents in the S&P Global press release as a reason for the composite French PMI to remain in deep contractionary territory. Contrary to services, the manufacturing PMI moved sideways, staying at 45.2, in yet another sign of ongoing weakness in the eurozone industrial sector.

The subcomponent monitoring staffing levels declined further, suggesting companies intend to reduce jobs, which can be seen as a sign of easing labour market conditions. Together with high wage growth over the past quarters, resulting in a significant catch-up effect in real incomes following the loss in purchasing power, this should reduce some upward pressure on high wage growth in 2025.

Weak PMIs have been overstating economic weakness, as was reiterated in Q3, when GDP expanded by 0.4% q/q while the PMIs suggested stagnation. Still, the average PMI for Q4 softening compared to Q3 is consistent with our expectation of growth slowing in the final quarter of 2024: after expanding by 0.4% q/q in Q3, we expect the eurozone recovery to slow to 0.2% q/q in Q4.

ECB: Dovish comments signal easing path going forward – Following last Thursday’s 25bp rate cut, a number of Governing Council members have voiced their opinions on the future rate path, most notably Lagarde indicated this morning that she expects more rate cuts if the baseline projections hold. On services inflation, still at elevated levels and closely watched by the ECB, she commented that inflation momentum has dropped sharply, paving the way for a further normalisation in ECB policy rates. Looking further ahead and over the course of 2025, as the negative effects of US import tariffs on eurozone growth and inflation become clear, we see the ECB set for an extended rate cut cycle with the deposit rate eventually reaching 1% in early 2026. See our Global Outlook for more information.