Eurozone factory activity remained in contraction territory in January, marking the third consecutive month of decline, according to the latest Purchasing Managers' Index (PMI). However, there were signs of improvement as output rebounded during the month.

The HCOB Eurozone Manufacturing PMI rose to 49.4 in January 2026, up from 48.8 in December 2025. This figure exceeded market expectations of 49.1, signaling an easing of the downturn in manufacturing business conditions. A PMI reading above 50 indicates expansion, while a reading below 50 indicates contraction.

January's increase was primarily driven by a return to growth in production, supported by an improvement in new orders. This followed the first decline in output in ten months, which occurred at the end of 2025. Despite the increase in output, new orders overall remained weak. Demand from international clients decreased at the fastest rate in 11 months.

Despite the signs of recovery in output, other areas of the manufacturing sector continued to struggle. Manufacturing employment declined modestly, continuing a sequence of factory job losses for over two-and-a-half years. Companies also reduced their purchasing activity, although the pace of reduction was the slowest in six months. Furthermore, backlogs of work declined, suggesting that capacity was sufficient to handle existing orders.

On the price front, manufacturers faced more intense cost pressures. Input cost inflation accelerated to a three-year high, driven by rising prices for metals, energy and wages. However, companies struggled to pass these costs on to customers, and selling prices continued to decrease.

Business confidence among Eurozone manufacturers strengthened in January, reaching a near four-year high. This optimism may be linked to expectations of future output.

Different countries within the Eurozone experienced varying conditions in their manufacturing sectors. Germany's manufacturing sector showed signs of recovery, with the HCOB final Manufacturing PMI rising to 49.1 in January, from 47.0 in December. France, on the other hand, saw its Composite PMI fall below 50.0 due to a significant decline in the Services PMI.

Dr. Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented on the PMI data, stating, "Some progress can be seen in the manufacturing sector, but it's happening at a snail's pace". He also noted that companies have struggled to pass on increased input costs to customers.

Looking ahead, the Eurozone's manufacturing sector faces both challenges and opportunities. While input cost inflation and weak demand remain concerns, increased business confidence and a rebound in output provide some hope for a gradual recovery. Economists expect modest growth in 2026, supported by improving industrial prospects and a rebound in consumption.