Eurozone business activity ended the year in contraction. At 47.0, the flash composite output index was a full point short of market expectations and down from November's 47.6. The decline means that output this quarter contracted at the steepest rate in 11 years outside of the early months of Covid.

The latest fall in the headline index reflected additional weakness in both manufacturing and services. The flash PMI for the former was unchanged versus November's final print of 44.2 but within this, the output sub-index dropped 0.5 points to 44.1. In services, the flash PMI eased from 48.7 to 48.1.

Aggregate new orders decreased for a seventh straight month and matched the rapid pace seen in November. Goods demand declined for a remarkable twentieth straight month. Backlogs similarly diminished and at a faster rate than in mid-quarter. Predictably therefore, overall employment was trimmed for a second consecutive month, although service providers added to headcount marginally. In terms of inflation, input costs posted their smallest monthly rise since August but, ominously, output prices climbed by the most since May. Even so, looking ahead, business expectations continued to improve and hit their highest level since August. That said, overall confidence remains well below its long-run average in both sectors.

The disappointing December results very likely mean the Eurozone economy closed out 2023 in mild recession. Manufacturing in particular remains in the doldrums but service sector activity has also slowed sharply in recent months. Nonetheless, the ECB will be wary of lingering inflation pressures and a cut in official interest rates next quarter cannot be taken for granted. Today's update puts the Eurozone RPI at minus 15 and the RPI-P at minus 18. Both values show overall economic activity falling slightly short of market expectations.

Manufacturing is expected to edge slightly higher to 44.5 versus November's 44.2, with December services expected at 49.0 from 48.7.The key composite output is expected to edge up to 48.0.

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.