Economic contrasts sharpen: US shines amid European contraction
by Ben Poole
The most recent Purchasing Managers’ Index (PMI) data, covering December 2024, paints a stark picture of divergence among major economies as the new year begins. The services sector has emerged as a key driver of stronger output growth in the US, defying global headwinds. Meanwhile, the eurozone’s economy contracted marginally, weighed down by subdued demand and persistent challenges in manufacturing. Across the Channel, the UK reported its first decline in new business since November 2023, signalling renewed concerns over domestic economic resilience.
This data underscores the increasingly uneven recovery paths for global economies, with the US maintaining momentum while Europe and the UK grapple with stagnation or contraction. The contrasting trends raise questions about the durability of global growth and the differing policy challenges facing central banks and governments in the year ahead.
UK sees new business decline for first time since 2023
The seasonally adjusted S&P Global UK PMI Composite Output Index posted 50.4 in December, down from 50.5 in November and the lowest reading since October 2023. Weaker private sector output growth has now been recorded for four months in a row. The country’s services PMI stood at 51.1 in December, up slightly from 50.8 in November. In contrast, the manufacturing PMI fell to an 11-month low of 47.0, down from 48.0 in November.
December data indicated a marginal reduction in new order volumes, ending 12 months of expansion. Subdued demand and rising payroll costs meanwhile contributed to the sharpest fall in private sector employment since January 2021.
Overall cost pressures were the highest since April. This led to a robust and accelerated rise in prices charged by UK private sector companies at the end of 2024. Cost inflation in the services sector saw input prices rise at their fastest rate since April. Current and expected future cost increases led manufacturers to raise their selling prices proactively.
Manufacturing employment fell for the second month running, with the rate of job cutting hitting a ten-month high. Some firms noted that they were taking action in response to weak market conditions and that the forthcoming increase in employers’ National Insurance and the national minimum wage/national living wage had encouraged cutbacks to working hours and longer-term efforts to restructure workforces. Employment was also a weak spot for the service sector at the end of 2024. Lower staffing numbers have been recorded in each of the past three months and the latest reduction was the fastest since January 2021. Nearly twice as many survey respondents (23%) reported a fall in workforce levels. as those that signalled a rise (12%). Service providers widely commented on hiring freezes and the non-replacement of leavers due to rising payroll costs.
“Faced with subdued demand conditions and hikes to employment costs, many service providers opted to curtail their staff hiring and delay backfilling roles in December,” commented Tim Moore, Economics Director at S&P Global Market Intelligence. “Nearly one in four survey respondents saw an overall decline in their payroll numbers. Excluding the pandemic, this represented the steepest pace of job shedding for more than 15 years.”
Eurozone economy contracts marginally in final month of 2024
Meanwhile, in the eurozone, the economy concluded 2024 in a fragile state, as activity levels shrank amid sustained falls in new business and employment. There was also an intensification of inflationary pressures, while firms’ growth expectations for the coming 12 months remained weak despite improving to a three-month high.
The seasonally adjusted HCOB Eurozone Composite PMI Output Index – a weighted average of the HCOB Manufacturing PMI Output Index and the HCOB Services PMI Business Activity Index – posted in sub-50.0 contraction territory again in December, marking a second successive monthly decline in economic activity across the euro area. At 49.6, the index was up from November’s 48.3, indicating a deterioration that was not only softer than the previous month but just marginal overall.
Notably, the eurozone’s contraction in December was entirely manufacturing-led as services activity bounced back. However, with the expansion in services limited to just a modest pace, it was more-than-offset by a sharp drop in factory production.
As was the case in November, the big-three eurozone economies of Germany, France and Italy all posted reductions in business activity during the final month of 2024. France was the weakest performing, followed by Germany, while Italy saw just a marginal decrease in output. The other nations with Composite PMI available, Spain and Ireland, bucked the contraction trend and posted continued expansions in economic activity. Notably, private sector output in Spain rose at the fastest pace since March 2023.
Demand for euro area goods and services declined once again as 2024 came to an end, marking seven straight months of falling new orders. As was the case with output, services companies saw new business intakes rise (albeit only fractionally), but a sharp and accelerated fall in factory sales meant the overall trend in new orders remained a downward one. Euro area companies also received little support from their customers in export markets, with demand from non-domestic clients decreasing, stretching the current sequence of decline that has been ongoing for almost three years.
Employment across the single-currency market subsequently fell in December, with firms reducing their workforce capacity. In fact, the rate of job shedding was the joint-sharpest in four years (matching that seen in October). Job shedding was again exclusively driven by the manufacturing sector as a fractional and slower uptick in headcounts at services firms failed to counteract factory retrenchment.
Nevertheless, despite lower staffing numbers, eurozone companies were able to reduce their volumes of work-in-hand (i.e. orders received but awaiting completion) during December. Backlogged work has fallen in every month since April 2023.
December survey data signalled an acceleration of price pressures across the euro area. Input costs rose at a pace that was the fastest since July and stronger than the pre-pandemic survey average. Eurozone factories recorded no change in their expenses, whereas services companies saw a notable uptick. Charge inflation for the two monitored sectors combined likewise quickened and hit a four-month high. The composite data did, however, mask discounting by goods producers, with more aggressive price setting in the services industry driving overall output charge inflation up.
“The December PMI data doesn't exactly lay a fantastic foundation for a service sector boom in 2025, but at least incoming business has stopped falling and the decline in order backlogs has softened,” noted Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank. “Service providers can count themselves lucky that, unlike manufacturers, they're not directly affected by the threat of US tariffs. Overall, they should help ensure that industrial weakness doesn't completely drag down the entire economy in 2025.”
Service sector drives stronger output growth in the US
The US posted a rosier picture of business health compared to the UK and eurozone last month, where the S&P Global US Composite PMI Output Index increased to 55.4 in December from 54.9 in November. The latest index reading pointed to a marked monthly increase in business activity and one that was the fastest since April 2022.
The overall expansion in activity reflected strong growth in the service sector and was recorded despite a further decline in manufacturing production. The seasonally adjusted S&P Global Services PMI Business Activity Index for the US rose for the second month running in December, reaching a 33-month high of 56.8 following a reading of 56.1 in November. Service providers saw rates of expansion in business activity and new orders strengthen further in December amid a greater willingness among customers to spend following the Presidential Election result.
Business confidence also perked up. In line with the picture for business activity, the rate of expansion in new orders also reached the fastest since March 2022 in December. New business was up rapidly in the final month of the year, extending the current sequence of growth to eight months. With workloads rising, companies increased employment for the first time in five months.
There were further signs of cost pressures moderating in December as the pace of inflation eased for the third consecutive month to the weakest since last February. Input prices still increased markedly, however, and at a pace that was faster than the pre-pandemic average. A number of respondents mentioned higher shipping costs, while others reported wage pressures. In response to higher input costs, companies increased their own selling prices. The rate of inflation remained modest, despite quickening slightly from that seen in November.
While manufacturing contracted again - the seasonally adjusted S&P Global US Manufacturing Purchasing Managers’ Index posted 49.4 in December, down from 49.7 in November - this was actually up from the ‘flash’ reading of 48.3. Where new orders decreased for manufacturers, this was often linked to a reluctance among customers to commit to new projects. In some cases, this reflected a pause ahead of the new administration taking power in January.
However, survey respondents generally noted that the incoming administration is expected to help boost demand conditions in the new year. Manufacturers were therefore optimistic that output will increase over the course of 2025. That said, after jumping in November, sentiment fell back in December and was the lowest since August.
Positive expectations for the coming year encouraged manufacturers to increase staffing levels for the second month running. The rate of job creation was modest and slightly slower than seen in November.
“The strong service sector PMI reading for December sets the US economy up for a good start to 2025, but with growth as strong as this, it’s understandable that policymakers are taking a more cautious approach to lowering interest rates,” said Chris Williamson, Chief Business Economist at S&P Global Market Intelligence. “However, a key focus in the coming months will be the potential vulnerability of the economy to any major change in the interest rate outlook, especially as financial services activity has been an important engine of growth in late 2024, partly on the anticipation of a further lowering of borrowing costs.”
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