Eurozone manufacturing slides further into contraction in December

The eurozone’s manufacturing sector suffered a renewed setback as production declined for the first time since February and demand weakened sharply, S&P Global said in a press release.

Manufacturing conditions worsened across several major euro area economies. Germany recorded the weakest performance among the eight monitored countries, posting its steepest deterioration since February last year. Italy and Spain also slipped back into contraction, pointing to renewed weakness in southern Europe. In contrast, France bucked the broader trend, with its PMI jumping to a 42-month high, marking its strongest expansion since June 2022. Greece and Ireland continued to lead the rankings, while the Netherlands remained in modest growth territory.

After nine consecutive months of expansion, eurozone factory output declined in December, driven by an accelerated fall in new orders. New business contracted for a second successive month, with the pace of decline the sharpest since early 2025. Export demand was a key drag, as international orders fell at the fastest rate in 11 months.

Manufacturers responded by cutting purchasing activity at the strongest pace since March last year, while inventories of raw materials and intermediate goods declined notably. Finished goods stocks also fell, though at the slowest rate since September 2024.

Supply-chain pressures showed signs of re-emerging. Average supplier delivery times lengthened by the most since October 2022, while input cost inflation rose for a second month in a row to a 16-month high. Despite firmer cost pressures, manufacturers continued to discount output prices, with selling prices falling for the seventh time in the past eight months.

Employment conditions remained weak, with factory job losses extending into December and the current downturn in manufacturing employment stretching beyond two-and-a-half years. At the same time, backlogs of work continued to fall, indicating sufficient spare capacity across the sector.

Despite the challenging near-term conditions, business sentiment improved. Manufacturers’ expectations for output over the coming year reached their strongest level since February 2022, just before Russia’s full-scale invasion of Ukraine.

“Demand for manufactured products from the eurozone is slowing down again. Significantly fewer orders, declining order backlogs, and continued inventory reduction are the most obvious indicators of this. It is not surprising that companies are continuing to cut staff in this environment. Companies seem neither able nor willing to build momentum for the coming year, but are instead exercising caution, which is poison for the economy,” said Dr Cyrus de la Rubia, chief economist at Hamburg Commercial Bank.

He added that while 2025 saw some easing of the downturn, the sector failed to move onto a sustainable growth path. “For 2026, however, there is hope that Germany's economic stimulus programme and rising defence spending across Europe will breathe new life into the industry,” de la Rubia said, noting that confidence among manufacturers has risen further.

On pricing pressures, he observed: “Input prices have risen for the second month in a row. This cannot be due to energy prices, as oil and natural gas prices fell in December. However, industrial metals such as copper and tin saw a sharp rise… One explanation could be supply-chain problems, as indicated by longer delivery times.”

Highlighting regional divergences, de la Rubia said Spain’s recent slip into contraction and renewed weakness in Germany and Italy were disappointing, while France showed ‘signs of life again’. He cautioned that gaining traction in 2026 will be challenging, although expansionary fiscal policy could provide some support.

ALCHEMPro News Desk (SG)