(Jan 24): The euro area’s private sector grew in January after two months of contraction, surprising analysts as the embattled manufacturing sector showed small signs of improvement.

S&P Global’s composite purchasing managers’ index (PMI) rose to a five-month high of 50.2 from 49.6 the previous month, edging back above the 50 level that separates expanding from shrinking output. Analysts had estimated a reading of 49.7.

The result reflects a slightly stronger showing for manufacturers, though at 46.1 they remain deep in contraction territory. The services industry continues to be the bright spot, with its gauge broadly stable at 51.4.

“The kick-off to the new year is mildly encouraging — the private sector is back in cautious growth mode,” Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, said on Friday in a statement. “Germany played a major role in improving the eurozone economy, with the composite index jumping back into expansionary territory.”

The euro held gains against the dollar, trading around 0.8% higher at US$1.0493. Traders pared bets on European Central Bank (ECB) interest-rate cuts, pricing 90 basis points (bps) of reductions by year-end — down from over 100bps earlier this week.

Despite the PMI uptick, though, a meaningful revival in the region’s 20-nation economy looks some way off. The prospects for Germany, its biggest member, remain muted following a second straight year of falling output. France, meanwhile, is struggling with tight finances and unstable politics.

It’s hoped that a snap election next month may improve Germany’s fortunes, paving the way for more investments in infrastructure, for one. But in the short term, the Bundesbank sees the recent stagnation trend persisting. The country’s PMI reading only just exceeded 50.

Germany cut its 2025 forecast for growth in gross domestioc product to 0.3% from 1.1%, Handelsblatt reported on Friday, citing unidentified government sources. For the following year, it also trimmed its outlook to slightly above 1% from 1.6%, the report said.

The ECB should deliver some good news next week with the fifth quarter-point reduction in rates of this cycle. Others should follow, assuming President Donald Trump’s trade initiatives don’t derail them.

While he refrained from slapping tariffs on Europe in his early days back at the White House, he expressed his displeasure at how the region conducts trade, saying it treats the US “very very badly.”

“The second consecutive monthly rise in the headline PMI figure for the euro area suggests that the hit to activity from the rise in uncertainty created by Donald Trump’s tariff threats has been modest. However, the coast is far from clear — details of his plans have yet to emerge. Trade woes add to the list of reasons that the ECB should continue lowering interest rates — we expect 100 basis points of easing in 2025,” says David Powell, senior euro-area economist at Bloomberg Economics

ECB officials this week in Davos played down the inflationary threat from any levies imposed by Trump, expressing confidence that their 2% target will be sustainably met this year.

Price pressures haven’t fully abated, however. S&P Global’s January survey revealed the “most pronounced” increase in input costs in nine months in the services sector. Overall output costs also rose more quickly at the start of 2025.

“News on the price front is not encouraging,” de la Rubia said. “In the services sector, it’s likely due to wage increases, which rose in the eurozone at the highest rate since the euro’s inception during the third quarter of 2024.”

S&P Global said business confidence was broadly stable at the start of 2025, with manufacturers growing more bullish and companies remaining optimistic that output will increase over the coming year.

But while gross domestic product rose by 0.4% in the third quarter of last year, recent data suggest economic activity slowed towards year-end. Indeed, numbers for the following three months, due next week, are only likely to show meager growth.

PMIs are closely watched by markets as they arrive early in the month and are good at revealing trends and turning points in an economy. A measure of breadth of changes in output rather than depth, business surveys can sometimes be difficult to map directly to quarterly GDP.

Elsewhere, the UK’s composite PMI index increased to 50.9, while the US gauge — due later Friday — is expected to remain well above 50.

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