Private sector activity in the eurozone picked up notably in September, with the composite PMI surging to its highest level in nearly three and a half years. Both manufacturing and services recorded expansion, while Germany and France also showed improved performance. Meanwhile, new orders and export demand continued to recover, but the pace of both input costs and output price increases also quickened. The combination of growth resilience and inflationary pressures has sharpened market attention on the possibility of another European Central Bank rate increase before year-end.
Composite PMI Reaches 41-Month High
The eurozone composite PMI flash reading rose to 53.1 in September, up from 52.0 in August, marking the strongest level since April 2023. A reading above 50 signals economic expansion. September marked the third consecutive month of growth for the eurozone private sector, with the pace of expansion accelerating noticeably. By sector, both manufacturing and services maintained growth. The services business activity index climbed to 53.0 from 51.6 in August, hitting a 10-month high. The manufacturing output index edged up to 53.4 from 53.3, reaching a 55-month peak, while the manufacturing PMI held steady at 52.7. This indicates that September's growth was not driven by a single industry alone, but rather by contributions from both manufacturing and services.
Germany Accelerates Expansion, France Returns to Growth
The foundation of growth within the bloc also broadened. Germany posted its third consecutive month of economic expansion, with the pace reaching its fastest in nearly a year. France, meanwhile, ended a stretch of weak performance, with economic activity returning to growth for the first time in ten months. Beyond Germany and France, other eurozone economies also continued to expand at a solid pace. This shift suggests that the eurozone's prior reliance on a handful of countries for growth is easing, with core economies beginning to contribute again.
New Orders and Export Demand Show Clear Improvement
Another notable development in September was the strengthening of the demand side. Eurozone new orders grew for the third consecutive month, at the fastest pace since May 2022. Export orders also rose for a second straight month. More importantly, prior to this recent pickup, eurozone export orders had been declining for 53 consecutive months, so the turnaround signals a distinct improvement in external demand. The export recovery was primarily driven by manufacturing. This means the eurozone's current recovery is no longer solely reliant on businesses working through existing orders or domestic services demand, but is now being supported by fresh orders and external demand.
Employment Rises Modestly, Yet Gaps Persist Across Countries and Sectors
With business activity improving, eurozone companies continued to modestly increase headcount in September. Employment grew for a second consecutive month. Services firms added staff, while manufacturing employment remained broadly unchanged. Across countries, German employment growth was the strongest since mid-2023, but French firms continued to cut workers. The labour market improvement thus remains uneven, although the overall employment trend has begun to align with the economic upturn.
Price Pressures Intensify Again
Alongside accelerating growth, inflationary pressures also strengthened. In September, both input costs and output prices charged by eurozone businesses rose at the fastest pace in four months. Price increases were observed in both manufacturing and services and spanned the bloc's major economies. This suggests that the current economic recovery has not been accompanied by fading price pressures; instead, signs point to growth and inflation heating up in tandem. For the European Central Bank, this combination warrants particular attention. If demand continues to improve and firms can pass higher costs on to consumers, the pace of disinflation could be slower than previously anticipated.
Business Confidence Dips Despite Strong Activity
Despite faster current activity, business sentiment for the year ahead did not improve in tandem. In September, expectations among firms for the next twelve months fell to a three-month low. The decline was primarily driven by weaker optimism among French companies, while German firms' outlooks remained broadly stable. This indicates that while businesses are experiencing stronger demand in the present, they retain a degree of caution regarding future growth prospects. Geopolitical risks, rising costs, and the future interest rate environment remain key factors influencing business confidence.
Eurozone GDP Growth Could Reach 0.4% Per Quarter
Based on the September PMI readings, projections suggest the eurozone economy is currently tracking quarterly GDP growth of around 0.4%. If this pace can be sustained, it would significantly outperform some earlier market assessments of eurozone weakness. More importantly, this growth is occurring against a backdrop of geopolitical stress and rising prices, underscoring the resilience of the eurozone economy. It is also for this reason that strong growth data could ease the ECB's concerns about further monetary tightening harming the economy. If price pressures persist in the coming months and growth does not visibly weaken, the likelihood of another rate hike by the ECB this year will attract greater market scrutiny.
Overall, the eurozone economy displayed pronounced signs of recovery in September: the composite PMI reached a 41-month high, manufacturing and services expanded in tandem, Germany's growth accelerated, France returned to expansion, and new orders and exports improved markedly. At the same time, however, the pace of increases in business costs and output prices quickened once more. The signal from this PMI release, therefore, is not simply that "the economy is improving," but that growth is strengthening while inflationary pressures are also resurfacing. This is precisely why the data will further influence market expectations regarding the ECB's next policy moves.
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