Eurozone business activity continued to expand in December, marking a full year of growth for the first time since the COVID-19 pandemic, according to HCOB Flash PMI data released on Tuesday. However, the pace of expansion slowed towards the end of the year, signalling a more fragile economic backdrop.

The HCOB Flash Eurozone Composite PMI Output Index slipped to 51.9 in December from 52.8 in November. While the reading remains above the 50 threshold that separates growth from contraction, it points to a deceleration in overall activity.

Growth continued to be driven by the services sector, where the PMI eased to 52.6 from 53.6, a three-month low but still indicative of solid expansion. Manufacturing performance weakened, with the output index falling to 49.7 from 50.4, ending a nine-month run of growth and returning the sector to contraction territory.

At a country level, Germany saw output growth slow to a four-month low, while France came close to stagnation with only marginal expansion. Other eurozone economies continued to grow, albeit at a slower pace than in November.

Demand conditions softened. New orders rose for a fifth consecutive month but at a reduced rate, while new export orders declined at their sharpest pace since March. The fall was led by manufacturing, though services also experienced weaker export demand.

Employment across the eurozone increased for the third month in a row, with job creation slightly stronger than in November. Germany recorded a small decline in employment, while France posted marginal gains and the rest of the bloc saw modest growth.

Inflationary pressures picked up during the month. Input costs rose at their fastest pace in nine months, while output price inflation remained moderate but edged higher compared with November. Despite this monthly acceleration, average inflation levels for both input and output prices over the year were the lowest since 2020.

Business sentiment deteriorated, with overall confidence falling to a seven-month low. Optimism among service providers dropped notably, particularly in Germany where confidence sank to its weakest level in nearly two and a half years. In contrast, manufacturing optimism improved to its highest level since February 2022.

“Economic growth slowed at the end of the year due to a slight contraction in the manufacturing sector and weaker momentum in the service sector,” said Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank. “All in all, the runway into the new year seems pretty unstable.”

De la Rubia added that inflation in the services sector climbed to a nine-month high, a development that likely reinforced the European Central Bank’s decision to keep interest rates unchanged at its 18 December meeting.

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