Eurozone economy grows again, but one big problem isn’t going away

Business activity in the eurozone held firm in November, maintaining the solid pace of growth recorded in October — the strongest expansion in over two years — largely thanks to continued resilience in the services sector.

However, surveys showed a sharp rise in input costs for businesses, possibly driven by higher tariffs and rising electricity expenses.

Flash Purchasing Managers’ Index (PMI) data released on Thursday by S&P Gloabl showed the eurozone Composite PMI edging slightly lower to 52.4, from 52.5 in October, in line with expectations.

The services sector remained the key driver of growth, with activity rising to 53.1, its highest level since May 2024, defying forecasts of a modest slowdown.

Manufacturing, by contrast, lost momentum, with the PMI slipping to 49.7 — its weakest reading in five months — underscoring the persistent headwinds faced by the sector.

Despite the steady overall growth, the pace of new orders softened in November, as weakness in external demand continued to weigh on business prospects. Export orders, including intra-eurozone trade, declined for a second month, mirroring October’s pace.

Inflationary pressures re-emerged on the input side. Input prices rose at the fastest rate since March, driven by sharper cost increases among service providers and renewed input inflation in manufacturing — marking the steepest rise in eight months for the latter.

However, companies appeared increasingly unable to pass these costs on to customers.

Output price inflation eased to its slowest pace in over a year, suggesting tighter margins across the private sector.

Manufacturing firms kept prices flat, while price growth in services moderated to its lowest level since April 2021.

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Dr. Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said the divergence between cost and output price trends reflects increasing pressure on profit margins.

“The acceleration of cost inflation in the service sector is unlikely to go down well with the ECB,” he noted, though he added that the moderation in sales price inflation likely keeps policy concerns in check.

“We expect interest rates to remain unchanged in December,” he added.

Germany, the bloc’s largest economy, continued to expand in November but showed signs of slowing in its pace of growth.

The German Composite PMI declined to 52.1 from 53.9 in October, with both manufacturing and services losing momentum. Manufacturing activity fell to 48.4, while the services index dropped to 52.7.

“These figures are a major setback for Germany,” de la Rubia warned.

“Although production is slightly higher than in the previous month, new orders have now declined sharply… the economy is limping towards marginal growth at best in the fourth quarter.”

In contrast, France showed signs of stabilisation following months of contraction.

The Composite PMI rose to 49.9 from 47.7 in October, bolstered by a rebound in services, where the index climbed to 50.8 — its first expansionary reading this year. Manufacturing remained weak, however, slipping to 47.8.

Outside of Germany and France, the rest of the eurozone saw the strongest improvement, with business activity rising at the fastest pace since April 2023.

Global markets came under pressure on Friday, weighed down by a tech-driven selloff on Wall Street the previous day. Despite Nvidia’s upbeat quarterly earnings, investors continued to offload tech stocks amid fears of expensive valuations.

The retreat was further fuelled by diminishing expectations of a December rate cut by the US Federal Reserve. Market pricing now implies just a 30% probability of a 25-basis-point cut at the 10 December meeting. The Nasdaq 100 closed Thursday 2.38% lower. Meanwhile, the CBOE Volatility Index (VIX), a gauge of market fear, surged more than 11% to breach the 25 level — up 50% month-to-date.

In Europe, equity markets followed suit, with banking and industrial stocks leading declines.

The Euro STOXX Banks Index fell 1.3% by mid-morning in Frankfurt, with ING Groep and Deutsche Bank both down 1.7%.

Germany’s DAX shed around 1%, trading near the 23,000 level. Siemens Energy and Rheinmetall were among the hardest hit, slumping 7.3% and 5.4%, respectively.

The Euro STOXX 50 was also over 1% lower, dragged down by a 6% slide in chipmaker ASML Holding NV. Italy’s FTSE MIB declined 1.1%, with defence contractor Leonardo Spa falling almost 6%.

France’s CAC 40 proved more resilient, dipping just 0.5%, though Schneider Electric dropped 2.5%.