The eurozone manufacturing sector ended 2025 on a fragile note, with momentum slipping back into mild contraction. The manufacturing PMI fell to 48.8, its lowest level in nine months, as factory output declined for the first time since February. This marked a turning point after a long, but increasingly delicate, recovery phase.

The slowdown was driven by weakening demand. New orders fell at their fastest pace in almost a year, led by a sharper drop in export sales, signalling that external conditions remain a key drag on euro area industry. Firms responded by cutting purchasing activity and running down inventories, while employment losses continued, extending a long-standing trend of workforce adjustment.

At the same time, cost pressures resurfaced. Supply chains showed renewed strain as delivery times lengthened to their worst level since late 2022, and input cost inflation rose to a 16-month high. Even so, intense competition forced manufacturers to keep discounting output prices, squeezing margins further.

The regional picture was uneven. Germany, Italy and Spain weakened, while France stood out with its strongest expansion since mid-2022. Encouragingly, business confidence improved to its highest level since early 2022, suggesting firms are cautiously hopeful that demand conditions may stabilise as 2026 unfolds.

The Manufacturing Purchasing Managers' Index (PMI) provides an estimate of manufacturing business activity for the preceding month by using information obtained from a representative sector survey incorporating around 3,000 companies. Results 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). Released by S&P Global, national data are included for Germany, France, Italy, Spain, the Netherlands, Austria, the Republic of Ireland and Greece. These countries together account for an estimated 89 percent of Eurozone manufacturing activity.

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 ISM manufacturing index in the U.S. and the S&P Global PMIs elsewhere, 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.

The S&P Global PMI manufacturing data give a detailed look at the manufacturing sector, how busy it is and where things are headed. Since the manufacturing sector is a major source of cyclical variability in the economy, this report has a big influence on the markets. And its sub-indexes provide a picture of orders, output, employment and prices.