By Indradip Ghosh

Jan 6 (Reuters) - The euro zone economy expanded at a slower pace last month but ended 2025 with its strongest quarterly growth in more than two years as solid momentum in services offset a manufacturing contraction, a survey showed on Tuesday.

While manufacturing activity shrank, persistent growth in services kept the common currency bloc in a steady expansion last year even in the face of U.S. tariffs on European imports.   

HCOB's final composite Purchasing Managers' Index for the bloc, compiled by S&P Global and seen as a good gauge of overall economic health, eased to 51.5 in December from November's 30-month high of 52.8, below a preliminary estimate of 51.9.

That finish healthily above the 50 mark separating growth from contraction meant the economy expanded every month in 2025, a streak not seen since 2019. The fourth-quarter average PMI reading of 52.3 was the highest since the second quarter of 2023.

"Against this backdrop, GDP growth is likely to have accelerated," said Cyrus de la Rubia, chief economist at Hamburg Commercial Bank. 

"In 2026, the service sector should remain on a moderate growth path. The manufacturing sector is likely to benefit from higher demand for defence equipment and construction machinery... As a result, economic growth of well over 1% should be possible again, but is certainly not overwhelming."

New orders expanded for the fifth straight month but at the weakest pace since September, with the manufacturing sector showing a quicker decrease in new factory orders while services companies reported softer sales growth.

The services business activity index eased to 52.4 from November's 2-1/2-year high of 53.6.

Spain was the standout performer with its composite index rising to a two-month high, while Germany's expansion moderated to a four-month low. Italian business barely grew, and French private sector activity stagnated.

Meanwhile, input cost inflation accelerated to a nine-month high with intensifying price pressures across both sectors, though output price inflation remained unchanged from November.

“The European Central Bank continues to monitor service inflation very closely...and rightly so, because cost inflation in this sector rose again in December," de la Rubia added.

"This development, which was also accompanied by slightly higher inflation in sales prices, is, in our view, the most important reason why the ECB has not implemented any further interest rate cuts and does not appear to be planning any."

Overall employment growth ticked slightly higher from November, though it remained marginal due to continued manufacturing job cuts. 

(Reporting by Indradip Ghosh; Editing by Hugh Lawson)