By Joshua Kirby


Europe's economy likely started 2025 less weakly than it ended 2024, according to business surveys, but the threat of higher U.S. tariffs still tempers hopes that lower borrowing costs will help fuel a pickup as the year advances.

The eurozone Composite Purchasing Managers' Index, released by Hamburg Commercial Bank and S&P Global on Friday, rose in January to 50.2 from 49.6 a month earlier, beating economists' forecasts. The reading over 50 indicates private-sector activity increased for the first time since August, but only very slightly.

The rise "gives hope that the economy will pick up somewhat in the new year," said Vincent Stamer, an economist at Germany's Commerzbank. The euro hit its highest in more than five weeks versus the dollar following the surveys' release.

Still, growth at only at lackluster level adds to the likelihood that the European Central Bank will lower its key interest rates at next week's meeting of its governing council. Investors expect the ECB to continue with cuts for the following two meetings, according to LSEG Refinitiv data.

The surveys are "consistent with the economy stagnating," Capital Economics' Jack-Allen Reynolds told investors in a note.

European policy makers had hoped that a recovery in wages during 2024 would help boost growth, but that driver has proved weaker than expected as many households continue to save a large share of their incomes. At the same time, European manufacturers are facing increasingly tough competition in export markets.

By contrast, the U.S. economy has grown more rapidly than expected and American manufacturers rebounded from recent travails at the start of the year, according to surveys also set out Friday. The services sector lost some momentum, however, leading to a slowdown in the pace of the U.S.'s overall private-sector expansion.

Surveys released earlier in the day meanwhile pointed to a pickup in growth in both Japan and Australia, but a slowdown in India, which was the fastest-growing large economy in 2024.

That contrast in economic performance will likely result in the ECB cutting its key rate more rapidly than the U.S. Federal Reserve lowers borrowing costs, ECB President Christine Lagarde said earlier this week.

"We do have that divergence [in monetary policy] that has to do with a different economic setting at the moment, between the U.S. and Europe," she told CNBC on the sidelines of the World Economic Forum's annual meeting at Davos in Switzerland.

Still, Europe has a lot of things going for it, Lagarde said, pointing to a collective budget deficit much lower than that of the U.S., as well as easing inflation and cuts to borrowing costs. "Europe has a huge amount of talent, a huge amount of savings. And [there has been] a big wake-up call that is really calling Europeans to action," she said at a separate Davos panel Friday.

As in the eurozone, U.K. activity unexpectedly picked up a little pace, the surveys showed, though there were signs of weakening demand and falling jobs numbers. That suggests the stagnation seen in the British economy toward the end of last year could well persist into the first months of 2025. A survey of British consumers also released Friday showed confidence falling to its most pessimistic level since 2023.

Europe's economic growth faces a potential new squeeze in the form of trade tariffs on goods exported to the U.S. Following his inauguration for a second term this week, President Trump reiterated his threats to slap punitive duties on European import goods, alongside those from Canada, Mexico, and China, with all of whom the U.S. runs sizeable trade deficits.

"The European Union is very, very bad to us," Trump said, accusing the bloc of failing to buy U.S. agricultural goods and cars. "They're going to be in for tariffs," he warned.

The small increase in the January eurozone index was driven by a slight uptick in the manufacturing sector, which has struggled to recover from high energy prices and dwindling investment. The currency area's services sector, by contrast, expanded at a slower pace at the start of the year, the surveys suggest.

Still, a deterioration in the gauge of workforce numbers points to a weakening in the eurozone's labor markets in the months ahead, likely adding to concerns about a possible slide into recession.

The eurozone economy is likely to have expanded just 0.8% last year and to pick up to 1.0% in 2025, much slower than is estimated for the U.S., according to new projections set out this month by the International Monetary Fund. Regulation is holding back eurozone development, and policymakers should move to bring down internal barriers to trade, the IMF's Gita Gopinath said at Davos this week.

The eurozone's largest economy, Germany, booked a second straight year of contraction in 2024, figures showed last week, while its second-largest, France, likely recorded anemic growth in the year's final months, economists estimate.

"It is primarily the political crisis that is economically paralyzing [France,]" HCOB economist Tariq Kamal Chaudhry said.


Write to Joshua Kirby at joshua.kirby@wsj.com; @joshualeokirby


(END) Dow Jones Newswires

01-24-25 1051ET