Euro Zone Economy Boosted by Strong Service Sector Amid Manufacturing Slump

The euro zone economy ended 2025 with its strongest quarterly growth in over two years, driven by robust services despite a manufacturing decline. The Purchasing Managers' Index indicated continuous expansion each month. In 2026, moderate growth in services and increased demand in manufacturing is expected, with economic growth possibly exceeding 1%.

The euro zone economy recorded its strongest quarterly expansion in over two years, propelled by a resilient services sector counterbalancing a manufacturing slump. Key economic indicators noted a steady overall growth throughout 2025, despite challenges such as U.S. tariffs impacting European imports.

The HCOB's final composite Purchasing Managers' Index, an important marker of economic health, dropped to 51.5 in December from a previous high of 52.8, yet it remained above the critical 50 mark that separates growth from contraction. This reflects the zone's consistent monthly expansion in 2025, a feat last accomplished in 2019.

Despite the manufacturing sector's lag, service sector vitality and anticipated manufacturing demand in defense and construction are predicted to support economic growth, potentially exceeding 1% in 2026. Input cost inflation rose significantly, causing the European Central Bank to maintain a cautious approach to interest rates, focusing on inflation control.

(With inputs from agencies.)