The economic landscape of developed economies continues to reveal stark contrasts, particularly between the manufacturing and service sectorsDecember 16 marked a notable point as S&P Global released data indicating a further contraction in U.Smanufacturing activitiesThe Manufacturing Purchasing Managers' Index (PMI) for December fell to a preliminary value of 48.3, down from 49.7 in November, signaling ongoing challenges within the sectorThis decline in factory output was reported to be the lowest since May 2020, with the factory output index dropping to 46.0. In contrast, the services sector painted a different picture, with the service PMI increasing from 56.1 in November to 58.5 in December—a record high since October 2021. A similar trend was observed in both the Eurozone and the UK, where manufacturing and services were characterized by a 'fire and ice' scenario.

Professor Li Huihui from Lyon Business School provided insights to the 21st Century Business Herald regarding this economic divergence

He pointed to two core trends: the structural imbalance in the post-pandemic economy and the ongoing global industrial chain restructuringThe rebound in services is attributed to a compensation effect following pandemic restrictions, particularly in high-income nations where consumer habits have surged back towards services, creating a robust growth phase for this sectorConversely, sluggish recovery dynamics plague the manufacturing sector, hindered by unstable global supply chains, rising costs, and weakened demandEmerging markets are increasingly capturing more of the market share traditionally held by Western manufacturing, contributing to the rolling decline in orders for the U.Sand European marketsThe low return on manufacturing investments has drawn capital towards digital services and AI, further inhibiting the potential for revitalizing this sector.

Despite the ongoing recovery appearing feasible, significant challenges remain

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Zhao Xueqing, a senior researcher at the Bank of China Research Institute, noted to the 21st Century Business Herald that while the PMI indicates volatility in global manufacturing recovery, the service sector shows stable growthA cycle of interest rate cuts may assist in stabilizing services more quicklyHowever, concerns linger over a lackluster economic outlook and weak exports, which are dragging down manufacturing output and order momentum.

The uncertainty surrounding future performance raises critical questions: Can the resilience of the service sector be sustained? When might the struggling manufacturing sector find its footing?

The contrasting fortunes of manufacturing and services are evident in the U.Seconomy, where the divergence is intensifyingData from S&P Global revealed a further retreat in the December manufacturing PMI, with the service PMI reaching its fastest pace since October 2021, contributing to the highest composite PMI since March 2022.

In the Eurozone, the manufacturing PMI for December settled at 45.2, unchanged from the previous month, while the service PMI climbed from 49.5 to 51.4. The manufacturing sector has become a significant drag on economic growth, having contracted for 21 consecutive months, with the decline in December marking the largest drop in a year

Even with a bounce-back in the service PMI following a brief contraction in November, it failed to offset the decline in manufacturing, leading to an overall economic contraction where the December composite PMI registered at 49.5.

Regionally, Germany and France, the Eurozone's largest economies, also exhibited weakening economic conditions in DecemberGermany's service PMI recorded a preliminary value of 51, contrasting sharply with the manufacturing PMI of just 42.5, pushing the composite PMI slightly up to 47.8 yet still significantly below the neutral mark of 50. While service activities saw mild recovery, manufacturing output plunged to a three-month low due to a sharp decline in new orders and weak customer demand.

Cyrus de la Rubia, chief economist at Hamburg Commercial Bank, highlighted the concerning trends in service pricesDecember witnessed a considerable rise in input prices within Germany's service sector, indicating the highest levels since April

Typically, a sluggish economy is accompanied by falling prices; however, current conditions suggest a departure from this norm, showcasing that the established pattern of slowing economic growth correlating to diminished inflation may no longer holdEfforts by workers for higher wages have translated into rising costs for consumers amidst an uptick in service prices.

France faced a similar fate, with service contraction slowing but manufacturing PMI plummeting to a 55-month low at 41.9, while the service PMI hovered around 48.2, translating to a composite PMI of 46.7.

Economist Tariq Kamal Chaudhry also provided commentary on France's dire manufacturing scenario, projecting a challenging year for the sector in 2024, as consecutive months marked manufacturing declines with dire issues like domestic and international order shortages exacerbating the employment crisisThe combined effects of political instability, sluggish sectors such as construction and automotive, along with declining demand from other European nations have muted French manufacturing.

Similar trends appeared in the UK, where manufacturing output fell for the second consecutive month in December, with a further decline indicated by a manufacturing PMI of 47.3. Meanwhile, a slight growth in service output was noted, recovering from the low point in November with a service PMI reading of 51.4.

Chris Williamson, chief business economist at S&P Global Market Intelligence, observed that the UK is managing to skirt recession, with growth momentum rebounding towards the end of the year, even though predictions had earlier suggested a contraction might be imminent

Nevertheless, the resilience of the service sector combined with persistent inflation dynamics suggests that the Bank of England's discussions regarding interest rate cuts may be premature.

European pressures seem to be more pronounced, particularly given the evident weakness in the manufacturing sector compared to the U.SLi Huihui posited that the root causes of Europe's manufacturing struggles stem from both external market factors and internal structural challengesThe recovery trajectory in European manufacturing lags behind that of the U.S., heavily influenced by energy import dependencies which have faced a significant impact since 2022, particularly hampering Germany's heavy industryAdditionally, the relative inflexibility of the European Central Bank (ECB) in adjusting monetary policy diminishes its ability to provide timely financing and stimulus support for the manufacturing sector in comparison to the Federal Reserve

The reliance on exports further compounds the issue as waning global demand and intensified trade disputes put pressure on European manufacturing performance.

Li indicated that the ECB faces more pressing rate cut pressures than the Federal ReserveWith inflationary pressures easing in the Eurozone and increasing risks of economic decline in manufacturing, a more aggressive and rapid cut has become increasingly necessaryAny delays in ECB policy may open the door to deeper recession risks within the Eurozone economy.

Official forecasts from the Bundesbank indicate that after experiencing contraction this year, Germany is unlikely to see significant growth in 2024, with real GDP anticipated to decrease by 0.2%, down from an earlier forecast of a 0.3% increaseSimilar downgrades have been made by the Bank of France, reflecting the impact of political instability on consumer and business confidence, with growth projections adjusted down to just 0.9% in 2025, a reduction from previous forecasts.

In the UK, economic indicators quietly mirror the bearish trend

Recent reports from the Office for National Statistics highlighted that the UK’s GDP contracted by 0.1% in October, diverging from projected growth, marking two consecutive months of economic retraction—the first such occurrence since 2020.

Despite the apparent disparity between heated service sectors and waning manufacturing outputs, market experts caution that such distinctions may not last indefinitelyLi Huihui opined that the divergence between robust services and lagging manufacturing will likely not be tenable in the long termAn anticipated rebound in manufacturing during the first half of the next year may adjust the balance, as the compensatory effect of the services sector diminishes and normalization returns.

This interdependence between the two sectors plays an integral role in these predictionsService sector growth hinges on the manufacturing domain; dwindling manufacturing output equates to fewer job opportunities and slower wage growth, ultimately restraining consumer demand in the service industry

Although supply chain restructuring presents its own set of challenges, it also carries the seeds of new opportunities, particularly as Southeast Asia emerges as a significant player in the reshuffling of global supply chainsThe distinctions in policies between the Federal Reserve and ECB will also impact the pace of recovery for manufacturing sectors on either side of the Atlantic, with the Eurozone possibly leaning towards more aggressive easing measures.

The ramifications of Trump's proposed tariffs warrant careful monitoringLi noted that should Trump implement higher tariffs, the implications for U.S., UK, and European economies and PMIs would be vastWhile the immediate impact might offer some protection and bolster the U.Smanufacturing sector, the recessionary pressures this move would provoke on overall economic health would be concerning, heightening inflation and diminishing corporate profitability alongside consumer purchasing power

Europe, being a surplus-based economy heavily reliant on exports, particularly in major sectors like automotive and machinery, may see its manufacturing PMI further decline under the weight of intensified tariff pressures, leading to significant economic setbacks.

As policy shifts and global trade dynamics reshuffle, the effects of a shift in tariffs could further drive multinational companies' production capabilities towards Southeast Asia and other regions, introducing enduring competitive challenges for U.Sand European manufacturingZhao Xueqing expanded upon the multifaceted influence Trump’s proposed combination of high tariffs, low regulation, low tax rates, streamlined government, and immigration restrictions might have on the U.SeconomyProjections suggest a likely deceleration in U.Seconomic growth by 2025, heavily influenced by the repercussions stemming from high tariffs, retaliatory measures, and re-emerging inflationary pressures.

Consumers would likely bear the brunt of these tariff costs, experiencing a heightened cost of living, which could quickly cool private consumption growth

The National Retail Federation's research indicates that the introduction of Trump's proposed import tariffs could lead American consumers to face losses of up to $78 billion in purchasing capacity annuallyWith ongoing trade disputes, it’s plausible that the U.Strade deficit may not see relief, as import orders shift towards ASEAN and Mexico.

Moreover, Zhao pointed out that rapid expansions in U.Sfiscal policy may face constraints, while the crackdown on illegal immigration policies could exert significant stress on the U.Slabor market, particularly within labor-intensive industries like agriculture, construction, and services, ultimately hampering economic activity and resurrecting inflation anxiety.

On the monetary policy front, Zhao elucidated that the re-emergence of inflation risks could compel the Federal Reserve to adopt a more cautious approach to interest rate cuts, with forecasts indicating that the pace of reductions may slow down through 2025, stabilizing federal funds rates between 3.75% and 4%. The need for lower rates within the Eurozone, on the other hand, is more pressing, especially considering the enduring weakness in consumption and industrial sectors, prompting anticipations that deposit rates may fall to around 2% by 2025.