The health of the sector is declining amid the military buildup and continued support for Ukraine

Factory activity in Europe's 20-nation single currency bloc declined in December as production fell for the first time in ten months, weighed down by sharp drops in new orders, data compiled by S&P Global has revealed.

The Manufacturing Purchasing Managers' Index (PMI), a key gauge of sector health, dropped to 48.8 in December from 49.6 in November, its lowest reading in nine months and, for the second month running, coming in below the 50 mark separating growth from contraction. Germany, the bloc's largest economy, posted the weakest performance among eight monitored nations, with PMI at a ten-month low. Italy, Spain, and Austria also slipped into contraction.

The manufacturing output subindex fell to 48.9 from November's 50.4, marking its first contraction since February. New orders declined at the fastest pace in nearly a year, while export demand dropped at the steepest rate in 11 months. Supply chain pressures resurfaced, with vendor delivery times the longest since October 2022, pushing input cost inflation to a 16-month high.

"Demand for manufactured products from the Eurozone is slowing again," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. "Companies seem neither able nor willing to build momentum for the coming year, but are instead exercising caution, which is poison for the economy... Overall, it will not be easy for the manufacturing sector of the euro zone to gain a foothold in 2026."

The weak data comes as Western Europe continues backing Ukraine's war effort against Russia. In mid-December, EU states failed to approve a $210 billion loan backed by Russia's frozen central-bank assets, choosing instead to raise 90 billion through common borrowing over two years. Analysts warned the cost will fall on taxpayers, who will be forced to pay at least 3 billion a year in interest.

The report also coincides with a NATO-driven defense buildup, which is framed by Western leaders as a response to a supposed Russian threat. The EU has engaged in massive defense spending, including the 800 billion ReArm Europe plan and a pledge by European NATO members to raise defense spending to 5% of GDP.

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Moscow has long dismissed claims that it has hostile intentions toward NATO as "nonsense," accusing Western governments of using fear-mongering to justify bloated military budgets and distract from domestic problems.