(Bloomberg) -- 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.
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S&P Global’s Composite Purchasing Managers’ Index 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 Friday in a statement. “Germany played a major role in improving the euro-zone economy, with the composite index jumping back into expansionary territory.”
The euro held gains against the dollar, trading around 0.8% higher at $1.0493. Traders pared bets on European Central Bank interest-rate cuts, pricing 90 basis points of reductions by year-end — down from over 100 basis points 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 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.