Eurozone economy shows signs of recovery: February manufacturing decline eases, inflation falls for the first time in five months

According to the Zhitong Finance APP, a survey released on Monday showed that the prolonged downturn in the eurozone manufacturing sector showed further signs of easing last month, as demand declined at the slowest pace in nearly three years. The HCOB February eurozone manufacturing PMI, compiled by S&P Global, jumped to 47.6, higher than the estimated 47.3, and closer to the neutral threshold of 50. This index has been below 50 since mid-2022, but rose to 46.6 in January after a drop in December last year.

Nevertheless, Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, stated, "It is still too early to call it a recovery, but the PMI suggests that the manufacturing sector may be finding its footing. New orders are declining at the slowest pace since May 2022."

The new orders index, which measures demand, rebounded from 45.4 to 47.7. The output index soared from 47.1 to a nine-month high of 48.9, although it remains in the contraction zone. This indicator is seen as a barometer of overall health—the composite PMI will be released on Wednesday.

The pace of factory layoffs has indeed accelerated, but they remain hopeful about the outlook for the coming year. Cyrus noted, "Most companies remain optimistic about the future. The confidence index is slightly above the long-term average. This is surprising given the tariff threats from the United States."

Meanwhile, the eurozone's annual inflation rate in February experienced its first cooling in five months, which is reassuring news for European Central Bank (ECB) policymakers. The easing of inflation in the eurozone has bolstered confidence that it is approaching the 2% target. According to data from Eurostat, the preliminary year-on-year CPI for the eurozone in February recorded 2.4%, down from 2.5% in January. Although still high, the inflation in the services sector, which policymakers have been particularly focused on, has dropped to 3.7%. This is the first significant decline from 4% for this indicator since April 2024.

As the ECB enters the final phase of its rate-cutting cycle, the increasing internal policy divergence among ECB policymakers will complicate decision-making in the coming months, especially for the remainder of this year. Overall, a rate cut this week is a "high-probability event," with the interest rate futures market widely expecting a 25 basis point reduction in the deposit rate to 2.5% on March 6. However, this may be the last step that the 26 core policymakers of the ECB can easily reach a consensus on—debates over the magnitude and pace of subsequent rate cuts have recently intensified.

ECB officials have previously stated that they will continue to achieve price targets in the coming months, and the latest data further alleviated their concerns. The ECB has cut rates five times since June last year and is almost certain to cut rates again at this week's meeting. Analysts expect consecutive rate cuts until the deposit rate reaches 2%. However, investors believe that there may be a pause in rate hikes in April