Eurozone manufacturing PMI hits a three-and-a-half-year high, driven by Germany's rebound, while France remains hovering below the line of prosperity and recession

Economic activity in the Eurozone accelerated in February, with manufacturing returning to expansion territory, reaching a three-and-a-half-year high, injecting new momentum into the region's economic recovery. Germany's manufacturing performance became a key driving force, while the French economy continued to struggle on the edge of contraction, highlighting the divergence in the pace of recovery within the Eurozone.

Data released by S&P Global showed that the Eurozone's composite PMI rose from 51.3 in January to 51.9 in February, while the manufacturing PMI jumped from 49.5 to 50.8, reaching a 44-month high and crossing the 50 mark for the first time since last August. The services PMI slightly increased to 51.8, up from 51.6.

Germany's economy showed significant improvement, with the composite PMI rising to a four-month high of 53.1 and the manufacturing PMI reaching 50.7, marking its first entry into expansion territory since June 2022. In contrast, France's composite PMI rose from 49.1 to 49.9 but still failed to break the 50 threshold, with weak manufacturing continuing to drag down overall performance.

Cyrus de la Rubia, chief analyst at Hamburg Commercial Bank, stated that given the stable expansion of economic activity and high service sector inflation, the European Central Bank is expected to maintain its stance on keeping key policy rates unchanged.

Turning Point for Eurozone Manufacturing

The Eurozone manufacturing sector is showing several positive signals. The manufacturing output index rose to 52.1 in February, the highest level since last August, and for the first time since last August, it exceeded the growth rate of service sector activity. New manufacturing orders saw their first growth after six months of contraction, with the fastest growth rate in nearly four years.

Manufacturing purchasing activity expanded for the first time in three and a half years, although the increase was modest. The pace of decline in purchasing inventories and finished goods inventories both slowed to their slowest in months, marking the lowest declines in 37 months and 30 months, respectively. Supplier delivery times were extended for the ninth consecutive month.

Cyrus de la Rubia noted that the manufacturing foundation appears to be more solid, with most PMI sub-indicators such as purchase volume, future output expectations, and inventory indicators all above levels seen last August. However, he also emphasized that new orders need to show better performance in the coming months to instill more confidence in the industry's outlook.

Germany's Recovery Accelerates, France's Growth Lags

Germany's economic performance has become the main contributor to the improvement in the Eurozone. The composite PMI for Germany rose from 52.1 in January to 53.1, and the services PMI increased from 52.4 to 53.4, both reaching four-month highs. The manufacturing PMI reached 50.7, exceeding market expectations of 49.5.

Cyrus de la Rubia stated that this confirms the economic turning point that was particularly evident in January. German industrial orders unexpectedly rose in December, marking the largest increase in two years. He indicated that unless there is a significant decline in March, Germany's GDP may show notable growth in the first quarter. Increased public spending on defense and infrastructure, along with rising overseas demand, are supportive factors.

The French economy, on the other hand, continues to struggle. The composite PMI rose from 49.1 to 49.9, slightly better than the market expectation of 49.6, but still remains in contraction territory Economist Jonas Feldhusen from Hamburg Commercial Bank stated that the French private sector still struggles to gain real momentum, primarily dragged down by the demand side, with new orders declining again and export orders faring even worse.

A recent survey by the Bank of France shows that the country's economy is expected to improve later this year, with growth projected to reach 0.2% to 0.3% this quarter, driven by strong performance in the defense and aerospace sectors. However, the unemployment rate is expected to rise to 7.9% in the last few months of 2025, a four-year high.

Employment Contraction, Moderate Demand Growth

Despite an acceleration in economic activity, Eurozone companies have reduced their workforce for the second consecutive month. Manufacturing layoffs continue, while employment in the services sector remains flat, ending a five-year streak of job growth. Employment in Germany has declined, France remains flat, and other regions in the Eurozone have seen job increases. However, the pace of layoffs in German factories is the second slowest in nearly two and a half years.

Backlogs of orders have declined for nearly three years, with a slight decrease in February, the smallest in four months. New order growth remains moderate, consistent with January's pace. New orders in manufacturing have increased for the first time, but the growth rate of new business in the services sector has slowed. New export business (including intra-Eurozone trade) has declined again, with the drop being roughly in line with January.

Business confidence has slightly retreated from January but remains the second highest in 21 months. Manufacturing confidence has reached a four-year high, while confidence in the services sector is slightly below January but still optimistic about business activity growth in the coming year.

Inflation Pressures Persist, ECB Expected to Hold Steady

Input cost inflation has accelerated for the fourth consecutive month, rising to the fastest level in 34 months in February, matching the level of February 2025. Input costs in manufacturing have risen at the fastest pace since December 2022, while the increase in service input prices has slightly slowed.

The pace of output price increases has slowed slightly but still recorded the second-fastest growth in the past year. Sales price increases in manufacturing have accelerated, while those in services have slowed. German companies have significantly raised prices, while French companies have lowered output prices for the first time in three months, with price increases in other Eurozone regions accelerating.

Cyrus de la Rubia noted that price pressures in the services sector eased in February. Costs are still rising rapidly but not as much as last month, and the pace at which companies are raising prices for customers has noticeably slowed. He pointed out that given the stable expansion of economic activity and high service sector inflation, the European Central Bank may continue to maintain its stance of keeping key policy rates unchanged.