European Economy: Manufacturing Activity Shows Signs of Weakness

■ PMI survey shows the divergence between the sluggish manufacturing sector and the robust service sector continues.  

■ Supported by the gradual fading effects of fiscal spending and monetary tightening, moderate economic expansion is expected to continue in 2026. 
 
The weakness in Eurozone manufacturing activity was once again confirmed by the last manufacturing PMI data for 2025. The final reading of the Eurozone manufacturing PMI for December, released on the 2nd, was 48.8, down 0.8 percentage points from the previous month and revised down 0.4 percentage points from the preliminary reading. The pace of contraction in manufacturing PMI activity slowed significantly from the beginning of the year to the summer, indicating signs of recovery in the manufacturing sector. However, in December, the index fell below 50, considered the dividing line between expansion and contraction, for the second consecutive month, reaching its lowest level since February 2025. 
 
The market expects the final reading of the services PMI to be released that day to be in line with the preliminary reading (52.6, down 0.9 percentage points month-on-month), significantly higher than 50. Eurozone economic growth is mainly driven by the service sector, while the manufacturing sector remains weak, showing a clear divergence between industries. A stronger euro, rising US tariffs, and intensified competition from Chinese products continue to put pressure on the eurozone manufacturing sector. However, there are signs of improvement in outlook sentiment. Against the backdrop of increased defense and infrastructure spending driven by fiscal stimulus, manufacturing expectations for the coming year have risen to their highest level since February 2022, before Russia's full-scale invasion of Ukraine. 
 
Looking at the survey details, input prices rose to a 16-month high, while sales prices fell, indicating pressure from both the supply and demand sides. Rising metal prices and other factors have pushed up raw material costs, but weak demand and increased competition continue to exert downward pressure on prices, squeezing manufacturing profit margins. 
By country, Germany's weakness remains prominent (47.0, down 1.2 percentage points month-on-month). With declining new orders, the production index (48.3, down 2.6 percentage points month-on-month) fell to its lowest level in 11 months, dragging down the overall market. On the other hand, France, which had been sluggish for a long time (50.7, up 2.9 percentage points month-on-month), rebounded sharply, reaching a three-and-a-half-year high, also showing some positive signs. 
 
In 2025, the Eurozone economy, dragged down by the sluggish performance of core countries such as Germany and France, still maintained moderate economic expansion, supported by the strong performance of neighboring countries, Spain and Greece. In Germany, long-term fiscal constraints and slow industrial restructuring; in France, fiscal and political uncertainties became the main obstacles to economic recovery. Looking ahead to 2026 and beyond, the shift in fiscal policy in European countries is expected to gradually emerge. Although the specific scale and timing of fiscal stimulus are still difficult to determine, in 2026, the early stage of transformation, fiscal spending, centered on Germany seeking economic revitalization, is expected to support the economy. In addition, the European Central Bank (ECB) lowered its policy interest rate to the neutral level last year, and the inhibitory effect of monetary tightening on the economy will also weaken over time. It is expected that the Eurozone economy will continue to maintain moderate expansion in 2026.