PMI shows that economic growth in the Eurozone remains weak, with a divergence in performance between the two major "locomotives," Germany and France

According to the Zhitong Finance APP, business activity in the Eurozone saw almost no growth in February, intensifying concerns that the Eurozone economy remains deeply troubled. Data released on Friday showed that the Eurozone's February SPGI Composite PMI preliminary value was 50.2, consistent with the previous value and below economists' expectations of 50.5. Specifically, the Eurozone's February SPGI Manufacturing PMI preliminary value was 47.3, higher than the previous value of 46.6 and economists' expectations of 47; the Eurozone's February SPGI Services PMI preliminary value was 50.7, lower than the previous value of 51.3 and economists' expectations of 51.5.

Cyrus de la Rubia, an economist at Hamburg Commercial Bank, stated in a statement: “The almost unremarkable growth in the services sector offset the slight downturn in manufacturing.” He added that this data does not indicate that the economy is recovering.

As the Eurozone economy continues to languish, investors have increased their bets on interest rate cuts by the European Central Bank (ECB). The money market currently expects the ECB to cut rates by 78 basis points this year, up from the 74 basis points expected on Thursday. The euro maintained its earlier decline, and as of the time of writing, the euro was down 0.29% against the US dollar, at 1 euro to 1.047 US dollars. Eurozone bonds continued to rise, with the yield on Germany's 10-year government bonds falling by 3 basis points to 2.50%.

The sluggish manufacturing sector, political turmoil in the two major economies of Germany and France, increased uncertainty from the Russia-Ukraine conflict, and ongoing trade tariff threats from the United States have all weighed on economic growth in Europe. The latest shock comes from U.S. President Trump, who hinted that future support for European defense would be significantly weakened, meaning Europe itself would need to substantially increase military spending and reduce spending in other areas.

Eurozone economist David Powell stated: “The February PMI data for the Eurozone shows that the uncertainty caused by Trump's tariff threats has had a mild impact on the Eurozone economy. However, as the details of the proposed tariff measures remain unclear, the situation is far from clear. Regardless, aside from trade policy, the Eurozone economy has been weak for some time, but it may still benefit from further easing of monetary policy by the ECB.”

Since June of last year, the Eurozone PMI has fluctuated around the neutral line of 50. A series of interest rate cuts by the ECB since June of last year have helped prevent economic contraction. However, the long-awaited rebound in consumer demand and business spending has not materialized, even though the Eurozone's inflation rate seems set to return to 2% this year.

Before the elections on Sunday, the German economy appears to show signs of improvement, with hopes that conservative Friedrich Merz, who may become the next Chancellor, can reduce red tape and revitalize investment. Data showed that Germany's February SPGI Composite PMI preliminary value rose to 51, above the previous value of 50.5 and economists' expectations of 50.8 Cyrus de la Rubia holds an optimistic view on the prospects of the German economy, stating that the next German government may "be able to take action after the elections, which will also provide a positive boost for the entire eurozone."

In contrast, the economic outlook for France is concerning. Data shows that the preliminary SPGI Composite PMI for France in February is 44.5, down from the previous value of 47.6 and below economists' expectations of 48. Both the preliminary services PMI and manufacturing PMI are below the threshold.

It is worth mentioning that the overall indicator for the eurozone services sector remains high. Cyrus de la Rubia stated, "There are only two weeks until the European Central Bank's policy meeting, and there is bad news regarding prices. This is partly due to wage growth continuing to be above average."

The European Central Bank is increasingly confident that inflation will return to the target level of 2% in the coming months, allowing them to continue lowering borrowing costs and supporting the economy. However, European Central Bank Executive Board member Isabel Schnabel warned that since June of last year, the European Central Bank has already implemented five rate cuts and is now close to pausing or stopping rate cuts. She previously warned that rate cuts by the European Central Bank do not address the structural challenges facing the eurozone economy. She pointed out that the current economic growth in the eurozone can only be considered moderate, while trade uncertainty has "sharply" increased, and the assistance provided by easing monetary policy is limited. "Rate cuts can alleviate economic weakness but cannot resolve structural crises, including high energy prices, loss of competitiveness, and labor shortages."

Concerns over European Economic Growth Prospects under Trump's Tariff Threat

Meanwhile, the European economy also faces the threat of Trump's tariff "stick." Trump has complained on multiple occasions about the U.S. trade deficit with Europe and threatened to impose tariffs on EU goods. On February 10, local time, Trump signed an executive order announcing a 25% tariff on all steel and aluminum imported to the U.S. Trump stated that there would be "no exceptions or exemptions" for the related requirements.

The U.S. is the most important export market for European goods. Trump's tariff policy may exacerbate the already fragile European economy. Brian Coulton, Chief Economist at Fitch Ratings, stated that Trump's tariff policy will undoubtedly have negative impacts, especially against the backdrop of internal growth challenges facing the European economy. He pointed out that one of the most affected European economies may be Germany, primarily because Germany is a very open economy with a high proportion of exports to its GDP, and the U.S. is one of its important trading partners. Even before the tariff adjustments, Germany's exports were already under pressure, particularly in sectors such as the automotive industry, so this impact is undoubtedly negative Fitch Ratings has downgraded its growth forecast for the Eurozone in its latest global economic outlook, partly based on the assumption that a 10% tariff may be imposed on EU imports. Brian Coulton noted that while the negative impact on Europe is not as significant as it is for Mexico and Canada, it still represents a substantial negative shock, especially given the weak economic performance within Europe.

Bert Colijn, chief economist at ING, stated that in the short term, the European economy remains sluggish and is not expected to emerge from this predicament this winter; preliminary signs indicate that economic growth in the first quarter of 2025 will still be zero. He anticipates that demand may drive some growth in the European economy by the end of this year.

The European Central Bank expects Eurozone economic growth to be only 1.1% in 2025 and 1.4% in 2026. According to preliminary forecasts from Eurostat, the Eurozone manufacturing sector remains in contraction, while service sector activity is expanding, consumer confidence remains weak, and households have not significantly increased spending due to rising real incomes