Eurozone Economy Maintains Growth on Weak Demand (03.05.2025)

The eurozone economy continued to expand in February, but the growth rate remained the same as January levels, leading to only slight overall progress.

According to HCOB PMI survey data, the recovery remained fragile due to weak demand conditions, with new business volumes continuing to decline. Business confidence also saw a slight dip, and workforce numbers fell for the seventh month.

Rising Inflation and Higher Business Costs

Inflationary pressures intensified across the euro area, with input costs rising at the fastest pace in nearly two years. In response, companies raised their prices at the sharpest rate since April 2024.

The HCOB Eurozone Composite PMI Output Index, which combines Manufacturing and Services PMI, remained steady at 50.2 in February, just above the neutral 50.0 mark. While this signaled economic growth, it remained marginal and significantly below the long-term average of 52.4.

Several eurozone economies contributed to this modest growth:

• Spain led the expansion, with business activity accelerating.
• Ireland experienced faster growth.
• Italy saw output increase for the first time in four months.
• Germany posted its second consecutive month of growth, though at a slower pace.
• France remained the weakest performer, with business activity contracting for the sixth straight month at its sharpest rate in over a year.

Demand Weakness and New Orders

Despite the overall increase in output, new orders continued to decline, with demand for goods and services falling at a slightly faster rate than in January. Both manufacturers and service providers reported weaker inflows of new work, and export markets failed to provide support, as international business continued to shrink.

Declining Backlogs and Workforce Reductions

The eurozone has now seen nearly two years of backlog reductions, though the pace of decline slowed compared to the long-term trend. Businesses continued clearing outstanding orders at modest rates.

Workforce capacity was also further reduced in February, marking seven consecutive months of job cuts. While the decline in employment remained relatively mild, it was the fastest rate since December 2020. The job reductions were primarily seen in the manufacturing sector, while service businesses continued hiring.

Business Sentiment and Pricing Pressures

Despite ongoing challenges, eurozone companies remained generally optimistic about their 12-month outlook. However, growth expectations slipped slightly compared to January and were below the long-term average. Business sentiment was also weaker compared to the 2024 trend.

Regarding pricing, input costs surged in early 2024, with inflation reaching its highest level since April 2023. Companies became more aggressive with their pricing strategies, with the service sector driving inflation across the eurozone.

Source: Hamburg Commercial Bank AG & SP Global