The Eurozone economy returned to positive growth this month, albeit only just. January's flash composite output index rose from December's final 49.3 to 50.2, just above the 50-expansion threshold, 0.3 points stronger than the market consensus and a 7-month high. However, the latest reading, the first above 50 in seven months, still indicates little better than overall stagnation.

The headline improvement reflected better performances by both sectors. In manufacturing the flash sector PMI rose from December's final 47.8 to 48.8, a 5-month peak, while services climbed from 49.8 to 50.7, a 6-month high.

Within manufacturing, output (49.0 after 47.8) continued to contract but at the slowest rate since last July. Similarly, aggregate new orders also declined again but by the least in the last seven months. Backlogs essentially followed suit while employment growth was the best in three months. Against this backdrop, business expectations climbed sharply and reached their strongest mark since June 2020 on the back of solid gains in both sectors.

Less clogged supply chains helped to ease input cost inflation although what was the slowest rate since April 2021 remained well above its historic norm. By contrast, output price inflation was slightly firmer in both sectors.

Taken at face value, the January PMI data reduce the likelihood of the Eurozone sliding into recession. Still, the overall picture remains quite grim and the ongoing, if decelerating, decline in new orders hardly bodes well for the rest of the quarter. That said, today's update puts the region's ECDI at 34 and the ECDI-P at 40. In general, economic activity continues to perform a good deal better than expected which should clear the path to higher ECB interest rates next week.

After 47.8 for manufacturing in December and 49.8 for services, Eurozone PMIs in January are expected at 48.5 and 50.2, respectively.

The flash Composite Purchasing Managers' Index (PMI) provides an early estimate of current private sector business activity by combining information obtained from surveys of the manufacturing and service sectors of the economy. The flash data are released around ten days ahead of the final report and are typically based upon around 75-85 percent of the full survey sample. Results covering a range of variables including manufacturing output, employment, new orders, backlogs and prices are synthesised into a single index which can range between zero and 100. A reading above (below) 50 signals rising (falling) activity versus the previous month and the closer to 100 (zero) the faster is activity growing (contracting). The report also contains flash estimates of the manufacturing and services PMIs. The survey, produced by S&P Global uses a representative sample of around 5,000 manufacturing and services companies, the former including Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece and the latter Germany, France, Italy, Spain and the Republic of Ireland.

Investors need to keep their fingers on the pulse of the economy because it dictates how various types of investments will perform. By tracking economic data such as the purchasing managers' manufacturing indexes, investors will know what the economic backdrop is for the various markets. The stock market likes to see healthy economic growth because that translates to higher corporate profits. The bond market prefers less rapid growth and is extremely sensitive to whether the economy is growing too quickly and causing potential inflationary pressures.