Europe: Manufacturing Activity May Have Passed the Worst Period
2025-02-27
■ Since the beginning of the year, economic indicators in the euro area have shown signs of improvement, suggesting that the economy may be nearing the end of its cyclical downturn.
■ Manufacturing-related indicators have improved significantly, signaling a gradual recovery from the economic slump.
Despite the ongoing challenges in the euro area economy, there are early signs of a cyclical bottoming out since the start of the year. While key economic activity indicators, such as industrial production and retail sales, remained weak as of December last year, several survey-based indicators have shown improvement since January.
The most notable improvement has been in manufacturing-related indicators, suggesting that the cyclical adjustments driving the economic downturn are beginning to stabilize. The preliminary Purchasing Managers’ Index (PMI) for February revealed a composite PMI of 50.2, marking the second consecutive month above the 50-point threshold, which indicates an expansion in business activity. Although the services sector PMI has consistently remained above 50 since 2024, driving economic growth, the manufacturing PMI has been well below 50 for an extended period. However, the manufacturing sector has rebounded for two consecutive months, signaling a slowdown in its contraction rate.
Additionally, the European Commission’s business and consumer survey reported a manufacturing capacity utilization rate of 77.3% in the first quarter of 2024, the first increase in three years*1. Despite this improvement, the rate remains significantly below the long-term average since 2000 (80.6%), indicating that excess capacity in the manufacturing sector persists. Nevertheless, these figures suggest that manufacturing activity may be emerging from its most challenging phase.
Other survey-based indicators also reflect a positive trend. The Sentix investor confidence index rose to -12.7 in February, turning positive for the first time in seven months, while the ZEW economic expectations index reached 24.2, its highest level in seven months. The current situation indices for these indicators also improved. Analysts attribute this shift to market optimism surrounding the German federal parliamentary election on the 23rd and hopes for a potential ceasefire between Ukraine and Russia in February. Since these indices primarily survey market participants and financial experts, they tend to reflect more optimistic expectations compared to surveys targeting businesses and households. However, the overall trend aligns with the findings of the business and consumer surveys and PMI data.
Despite these encouraging signs, the manufacturing sector continues to face significant challenges. Business and consumer surveys highlight unplanned inventory backlogs, suggesting that inventory adjustments may continue to weigh on the sector in the short term. Furthermore, rising energy prices and labor costs persist, while weak consumer demand in China and the potential for additional U.S. tariffs on key eurozone exports, such as automobiles and pharmaceuticals, dampen prospects for external demand growth. For the manufacturing sector to achieve sustainable expansion, it must address these structural issues, which could otherwise undermine the current cyclical recovery.
■ Manufacturing-related indicators have improved significantly, signaling a gradual recovery from the economic slump.
Despite the ongoing challenges in the euro area economy, there are early signs of a cyclical bottoming out since the start of the year. While key economic activity indicators, such as industrial production and retail sales, remained weak as of December last year, several survey-based indicators have shown improvement since January.
The most notable improvement has been in manufacturing-related indicators, suggesting that the cyclical adjustments driving the economic downturn are beginning to stabilize. The preliminary Purchasing Managers’ Index (PMI) for February revealed a composite PMI of 50.2, marking the second consecutive month above the 50-point threshold, which indicates an expansion in business activity. Although the services sector PMI has consistently remained above 50 since 2024, driving economic growth, the manufacturing PMI has been well below 50 for an extended period. However, the manufacturing sector has rebounded for two consecutive months, signaling a slowdown in its contraction rate.
Additionally, the European Commission’s business and consumer survey reported a manufacturing capacity utilization rate of 77.3% in the first quarter of 2024, the first increase in three years*1. Despite this improvement, the rate remains significantly below the long-term average since 2000 (80.6%), indicating that excess capacity in the manufacturing sector persists. Nevertheless, these figures suggest that manufacturing activity may be emerging from its most challenging phase.
Other survey-based indicators also reflect a positive trend. The Sentix investor confidence index rose to -12.7 in February, turning positive for the first time in seven months, while the ZEW economic expectations index reached 24.2, its highest level in seven months. The current situation indices for these indicators also improved. Analysts attribute this shift to market optimism surrounding the German federal parliamentary election on the 23rd and hopes for a potential ceasefire between Ukraine and Russia in February. Since these indices primarily survey market participants and financial experts, they tend to reflect more optimistic expectations compared to surveys targeting businesses and households. However, the overall trend aligns with the findings of the business and consumer surveys and PMI data.
Despite these encouraging signs, the manufacturing sector continues to face significant challenges. Business and consumer surveys highlight unplanned inventory backlogs, suggesting that inventory adjustments may continue to weigh on the sector in the short term. Furthermore, rising energy prices and labor costs persist, while weak consumer demand in China and the potential for additional U.S. tariffs on key eurozone exports, such as automobiles and pharmaceuticals, dampen prospects for external demand growth. For the manufacturing sector to achieve sustainable expansion, it must address these structural issues, which could otherwise undermine the current cyclical recovery.