Eurozone December Manufacturing PMI Accelerates Decline, Supporting Expectations for Significant Rate Cuts by the European Central Bank
The final value of the Eurozone's December Manufacturing PMI was revised down to 45.1, indicating an accelerated contraction in manufacturing activity and weak signs of economic recovery. Major economies such as Germany, France, and Italy have fallen into recession, with significant declines in both new orders and backlog orders. Despite manufacturers continuously lowering prices, layoffs are still intensifying. The European Central Bank has lowered its economic growth forecast, expecting growth of only 1.1% in 2023, and may implement larger rate cuts to address economic weakness
According to Zhitong Finance, a survey shows that the Eurozone manufacturing sector performed poorly at the end of last year, with a faster decline in factory activity and almost no signs of an impending economic recovery. As the three largest economies in the Eurozone—Germany, France, and Italy—fall into manufacturing recession, the scope of the economic downturn has expanded again. The HCOB's final December Eurozone manufacturing PMI was revised down to 45.1, slightly below the initial value and further below the neutral threshold of 50. The index was 45.2 in November and has remained below 50 since mid-2022.
An index measuring output fell from 45.1 in November to 44.3; this indicator is used to calculate the composite PMI to be released next Monday, which is seen as a good indicator of economic health.
Secondly, the index measuring new orders further fell below the neutral line, dropping to a three-month low, while the index measuring backlogged orders declined from 42.9 to 42.0, indicating that more overall activity is aimed at meeting old demand. Despite factories cutting prices for the fourth consecutive month and some improvement in optimism for this year, manufacturers are still laying off workers.
Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, stated, "Even in December, manufacturing did not bring any holiday cheer. It's the same old story—sluggishness. The decline in new orders even exceeded the previous two months, crushing any hopes for a rapid economic recovery. This view is supported by the accelerated decline in backlogged orders."
U.S. President-elect Donald Trump will return to the White House later this month, proposing a 10% tariff on all imported goods, which would make European products more expensive and therefore less popular in the U.S., further impacting Europe's already weak manufacturing sector. In the European Central Bank's latest quarterly forecast, the central bank downgraded its economic growth forecast for the region, expecting a growth rate of only 1.1% this year. This forecast does not even account for the potential drag from Trump's U.S. trade policies or the political turmoil in Germany and France.
In this context, the European Central Bank may provide some support. Previously, several ECB officials have signaled a dovish stance to calm the market, stating that there will be larger rate cuts this year. For example, François Villeroy de Galhau, a member of the ECB Governing Council and Governor of the Bank of France, previously stated that the ECB would further lower borrowing costs by 2025, making investors' bets on rate cuts exceeding 100 basis points seem reasonable. According to an earlier survey, economists expect the ECB to cut rates by at least 100 basis points this year