The Manufacturing Renaissance: Breaking a Two-Year Contraction

Throughout 2024 and most of 2025, the Eurozone exhibited a “dual-speed” recovery defined by a resilient, inflation-adjusted service sector that masked a protracted, deep recession in manufacturing. The industrial contraction was primarily a prolonged hangover from the severe energy price shocks of 2022, compounded by weak global demand, aggressive monetary tightening by the European Central Bank (ECB), and the systemic threat of deindustrialization. [1]

February 2026 flash PMI data provides empirical confirmation that this dual-speed dynamic has fundamentally realigned. The HCOB Eurozone Composite PMI Output Index, compiled by S&P Global, advanced from 51.3 in January to 51.9, marking a three-month high and decisively maintaining the regional economy in expansionary territory above the neutral 50.0 threshold. [1]

The structural narrative lies in the underlying composition. The headline Eurozone Manufacturing PMI surged to 50.8, up from 49.5 in January — pushing the index to a 44-month high and placing the manufacturing sector firmly back into expansion for the first time in over two years. This represents the most robust acceleration in factory output witnessed in four years, effectively outpacing the service sector for the first time since August 2025. [1]

Crucially, this is not merely a statistical artifact of temporary inventory restocking. The data reveals that confidence within the goods-producing sector has risen to its brightest level in four years. The stabilization and subsequent acceleration of industrial output suggests European manufacturers have largely adapted to the structurally higher energy cost environment, optimized their supply chains, and are beginning to capitalize on stabilizing global demand. [1][3]

Service Sector Deceleration and the Employment Stagnation

Conversely, the previously dominant service sector shows clear signs of cooling momentum. The flash Eurozone Services PMI Business Activity Index recorded a reading of 51.8 in February, a marginal increase from 51.6 in January, but notably underperforming against consensus estimates of 52.0. While still indicative of positive growth, the momentum has undeniably slowed, with new business inflows rising only marginally. [2]

This deceleration accompanies a highly significant labor market development: the stagnation of service sector employment growth. Across the Eurozone, employment fell marginally for a second successive month, effectively terminating a five-year trajectory of continual hiring expansion. Firms cite the urgent necessity of cost reduction and the acute pressure of higher wage demands as primary deterrents to further headcount expansion. [1]

The ECB noted this deterioration in employment perceptions, with the composite employment indicator declining from 50.4 in December to 49.9 in January, driven almost entirely by the services sector dropping to 50.5. In a contrarian development, the PMI employment indicator for manufacturing showed a slight increase during the same period, moving from 47.7 to 48.1 — further evidencing the sectoral rotation taking place. [6]

Germany: The Industrial Engine Reignites

Germany, traditionally the industrial powerhouse of the European continent, is the primary catalyst for the current manufacturing rebound. The HCOB flash Germany composite PMI rose to 53.1 in February from 52.1 in January, comfortably beating consensus estimates. The German flash manufacturing PMI surged to an impressive 50.7 — a dramatic turnaround from 49.1 in the previous month. [4]

This resurgence is supported by accelerating activity across both goods and services, pushing future output expectations to a joint-highest level in four years. Analysts point to several idiosyncratic domestic factors driving this German exceptionalism within the bloc. [1]

Fiscal deployment is playing a critical role. The imperative to fully allocate and disburse the remaining tranches of the European Union’s NextGenerationEU recovery funds before the end of 2026 is creating a surge in localized capital expenditure. Additionally, substantial German public investments in defense architecture and domestic infrastructure are creating a reliable, multi-year pipeline of industrial orders, effectively shielding domestic producers from broader global volatility. [5]

France: Teetering on the Edge of Contraction

The French economy, conversely, continues to struggle on the precipice of contraction, acting as an anchor on the broader regional aggregate. While French manufacturing output did register a marginal rise for the second consecutive month — marking its best back-to-back monthly performance in four years — the broader French economy faces structural headwinds. [1]

Overall output fell marginally in France, led by a slight drop in service output. Political uncertainty, attempts at fiscal consolidation, and subdued domestic consumer confidence continue to limit the velocity of recovery relative to Germany. This Germany-France divergence represents a persistent structural risk for the Eurozone — the two largest economies pulling in opposite directions creates policy tension for the ECB, which must set a single monetary policy for both. [1]

UK Context: Export Orders Surge to Four-Year Highs

While structurally separate from the Eurozone, the UK economy provides vital context. In February 2026, the UK private sector expanded at its fastest pace in 22 months. The S&P Global Flash UK PMI Composite Output Index rose to 53.9. [2]

Mirroring the Eurozone, the UK Manufacturing Output Index jumped to a 17-month high of 53.6, and the headline Manufacturing PMI climbed to an 18-month high of 52.0. This acceleration was driven by a robust upturn in new work, with export orders rising at the fastest rate in four-and-a-half years, supported by rising demand from the US, Asia, and the continent. [2]

However, like the Eurozone, UK employment fell for the seventeenth consecutive month as service providers recorded sharp drops in payrolls due to squeezed margins, hiring freezes, and strategic investments in technology-driven productivity improvements. [7]

ECB Monetary Policy: A Complex Calculus

The manufacturing-led recovery presents a complex policy calculus for the European Central Bank. While output price inflation dipped slightly across the bloc and remains broadly consistent with the ECB’s 2 percent target, underlying input cost inflation accelerated to a 12-month high in February. Manufacturing selling prices specifically increased at the fastest rate observed since April 2023. [1]

These pricing pressures are intrinsically linked to labor market dynamics. Rising prices are attributed by surveyed firms to structural wage cost increases, particularly in Germany where new minimum wage implementations and aggressive union negotiations have cemented a higher floor for labor costs. The ECB’s recent macroeconomic projections note data surprises regarding HICP inflation and wage growth, necessitating an upward revision of 0.2 percentage points to the headline inflation outlook for 2026. [8]

Consequently, while the broader trajectory of monetary easing remains intact following the aggressive rate hiking cycle of 2022–2023, the persistence of service-sector wage inflation and renewed industrial appetite for raw materials suggest the return to a neutral interest rate will be highly protracted, cautious, and intensely data-dependent. The combined survey data currently signal quarterly GDP growth of 0.2 percent for Q1 2026, generating a positive carry-over effect that ensures the Eurozone avoids technical recession — but leaves the central bank with limited maneuverability against localized inflationary spikes. [1]