Eurozone's MixedApril Economic Performance
Economic growth in the Eurozone falters as service sectors falter, despite a rise in manufacturing activities
The Eurozone's economic growth inched ahead in April, but the progress was sluggish as a limping services sector offset a surprising rebound in manufacturing. Despite cooling inflation, weak demand and waning confidence cast a gloomy outlook for the near future.
Business activity in the Eurozone barely moved in April, with the S&P Global Purchasing Managers' Index (PMI) edging up to 50.1, a level signaling growth, but only just. This weak growth followed the first quarter's robust 0.4% expansion and raises questions about the economy's ability to maintain momentum.
Manufacturing output surged at its fastest pace in over two years, buoyed by improved supply chains and a rebound in industrial activity. However, the services sector, the Eurozone's economic workhorse, barely grew, with the Services PMI falling to 50.1 from March's 51.0. This marked the weakest reading since late 2024 and suggests that demand across tourism, hospitality, and business services is losing steam.
"The services sector stagnated in April. Even though manufacturing output saw a surprising uptick, it wasn't enough to prevent the overall slowdown in growth," said Dr. Cyrus De La Rubia, Chief Economist at Hamburg Commercial Bank.
Demand Drops, Sentiment Sinks
Behind the headline figures, the data painted a dismal picture. New business orders fell for the eleventh consecutive month, and at a faster rate than in March. Both goods producers and service providers reported weaker sales, continuing a trend of soft demand that has restrained growth since mid-2023.
France once again stood out for the wrong reasons, with its composite PMI signaling contraction for the eighth month in a row. The eurozone's second-largest economy remains mired in political uncertainty and stagnation, in stark contrast to comparatively better performances in Spain, Italy, and Germany.
"Spain is leading the pack in terms of growth, followed by Italy, then Germany with marginal growth, and France trailing behind," said De La Rubia. "We expect Germany to soon outpace Italy thanks to a generous fiscal package, while France is likely to remain at the bottom for now."
Employment across the bloc ticked up for a second straight month, as rising headcounts in services offset ongoing declines in manufacturing. Despite the upward trend, businesses remain reluctant to expand their workforce, reflecting deeper caution amid persistent economic uncertainty.
Confidence about the future has also plummeted. Business expectations for the year ahead declined to their lowest level in almost two and a half years. This four-month streak of declining expectations highlights how soft demand and geopolitical uncertainty are dampening sentiment.
Inflation Elasticity for ECB Rate Cut
There is a silver lining for policymakers. Price pressures continued to moderate in April, with input cost inflation at a five-month low and output charges rising at their slowest pace in 2025 thus far. This could bolster the European Central Bank's case for a rate cut in June, a move several Governing Council members have already signaled.
"In the services sector, cost pressures are still relatively high, though they have eased a bit over the past couple of months," said Dr. De La Rubia. "Inflation is down for sales prices and continued to trend lower... These latest figures seem to support the ECB's stance."
With inflation moderating and growth still tepid, markets are increasingly pricing in a rate cut at the ECB's next meeting.
Stock Market Dip
In equity markets, eurozone stocks gave up some ground on Tuesday following a strong run in recent weeks. The Euro STOXX 50 index slid 1%, with Germany's DAX down 0.7% and France's CAC 40 lower by 0.5%. Industrial giants were among the laggards, while earnings news added volatility.
Economic conditions, trade uncertainties, and potential tariff impacts continue to pose challenges for the Eurozone economy. The services sector's resilience, employment trends, and future rate adjustments by the ECB would be critical factors to watch in the coming months.
- The services sector's sluggish growth and the continuous decline in new business orders in the Eurozone indicate increasing pressures on the economy, signalling a potential slowdown in finance and business activities.
- Meanwhile, despite the easing of cost pressures and the possible support for a rate cut by the European Central Bank (ECB), policymakers face the challenge of boosting business sentiment, which has sank to its lowest level in almost two and a half years due to soft demand and geopolitical uncertainty.
- As economic conditions persist and the services sector remains resilient, employment trends, and future rate adjustments by the ECB would be key factors to monitor, with potential implications for the stock market performance in the Eurozone, as demonstrated by the recent dip in the Euro STOXX 50 index.
