Eurozone industry woes deepen as key economies falter

The latest PMI data for the eurozone highlight that the industrial sector has been experiencing a deep slowdown for two and a half years. The main index fell from 45.2 points in November to 45.1 points in December, marking the lowest result in three months and signalling the thirtieth consecutive month of economic downturn.

The situation in European industry remains highly diverse geographically. Spain and Greece, with indices of 53.3 and 53.2 points respectively, experienced accelerated growth. Meanwhile, the largest economies found themselves in a phase of deep sector contraction – the German PMI dropped to 42.5 points, and the French PMI reached a dramatically low level of 41.9 points, the worst since May 2020.

The flow of new orders decreased again in December, and the rate of decline accelerated compared to November. The scale of the reduction was similar to the average of the last 32 months, counting from the beginning of the current downturn. The situation looked slightly better in the export area, where the rate of order decline slowed compared to the previous three months, suggesting that the main source of problems is currently the eurozone's internal market.

The level of production in December dropped the most since October 2023. Companies, aiming to maintain current activity levels, more often resorted to fulfilling backlogged orders, whose volume was decreasing at an accelerated pace. The situation is particularly difficult in the intermediate goods sector, where declines were deepest.

Employment reduction in eurozone industry has been ongoing for a year and a half. In December, layoffs slightly slowed compared to November, but the scale of job cuts remained significant. Entrepreneurs point to the need to adjust employment levels to weaker demand and uncertain economic prospects.

There is some stabilisation in the pricing area—in December, for the first time since August 2024, purchasing costs stopped falling. Nevertheless, producers continued to lower finished goods prices for the fourth consecutive month, indicating strong competitive pressure in the market. Companies also significantly reduced the volume of material and raw material purchases, leading to a decline in warehouse inventories at the fastest pace since 2009.

Experts pay particular attention to the situation in the largest eurozone economies. Spanish industry, despite positive results, is unable to counterbalance the problems of the main economies due to its relatively small share in the eurozone GDP, amounting to about 12 per cent. A positive aspect is the slight improvement in business expectations for production in the next 12 months, although they remain below the long-term average.

Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, emphasises in commentary on the data that in December, the industry could not announce any good news.

The situation is developing as before, i.e., declining. The number of new orders fell even more than in the previous two months, which dashes hopes for a quick recovery - he notes.

He believes the accelerated decline in production backlogs confirms this assessment. The condition for industry recovery is for companies to rebuild their semi-finished product inventories again. In December, there were no signs of such a development. On the contrary, the analyst emphasises that inventories were reduced at the fastest pace of the entire year.

He believes that EU companies have also accelerated the sale of their finished goods inventories as they expect weak demand to continue. Companies still reduce employment; though the rate of job cuts slightly weakened in December, it remains relatively high. The analyst summarises that this trend will continue due to numerous reports of long-term restructuring plans in companies in the new year.