Economic activity across the Euro zone slowed more than expected at the end of 2025, according to HCOB Flash PMI data released on Tuesday, highlighting a continued industrial contraction and easing in services growth. The composite PMI fell to 51.9 in December, down from 52.8 in November, marking a three-month low despite remaining above the 50.0 threshold that signals expansion. The deterioration was largely driven by a pronounced downturn in German manufacturing, where output and new orders declined at faster rates, while France showed some signs of stabilising industrial activity. Services sectors, although still posting growth, did so at a reduced pace, with firms reporting softer demand and slower hiring intentions. Business confidence slid to its lowest level since mid-year, indicating increased caution among firms as they look toward 2026.

Manufacturing PMIs across major economies in the bloc told a mixed story: Germany’s manufacturing PMI dipped into contraction territory, while some French industrial firms reported modest expansions, buoyed by specific segments such as aerospace and heavy equipment. Despite these differences, overall demand for goods weakened, complicating the outlook for core exporters in the Euro zone. Services growth eased too, with firms citing slower client activity and rising cost pressures that squeezed margins. New orders across the region softened, indicating that forward production expectations might remain subdued heading into the first quarter of 2026.

Employment trends from the PMI survey suggested that hiring remained positive but at a decelerated pace — a signal that firms are taking a cautious approach to workforce expansion in light of economic uncertainties. Some sectors reported personnel shortages in technical roles, while others paused or slowed recruiting to manage costs. Inflation pressures remained near the European Central Bank’s target of around 2%, with input and output price indexes showing moderate increases. Central bankers are watching these trends closely, balancing the need to sustain growth against inflation dynamics that have yet to fully stabilize.

Market analysts believe that the PMI data could influence monetary policy discussions in early 2026, especially with multiple central banks set to announce decisions later this week. While inflation remains contained, slowing growth could prompt cautious policy stances rather than aggressive tightening. The divergence between core industrial weakness and moderate services expansion underscores the uneven nature of the recovery across the region. Firms with diversified operations across manufacturing and services may fare better, but concentrated exposure to industrial demand may present headwinds for output and investment plans.

For investors and corporate planners, the softer PMI signals suggest a muted start to 2026 for key Euro zone economies, with caution dominating strategy discussions. Companies may prioritise cost control and operational efficiency over expansion until clearer economic signals emerge. Persistent global trade uncertainty, geopolitical tensions and evolving monetary regimes will likely shape business decisions as firms adapt to slower momentum. The data reinforces the view that while activity remains above contraction thresholds, the pace of growth may be losing steam as the year ends.

Source: Reuters