Euro zone business activity posts surprise upturn in September

The S&P Global Flash Eurozone Composite PMI surged to 53.1 in September, marking its highest level since April 2023 and exceeding the 51.7 projection in a Reuters poll. This unexpected rise in business activity across the euro zone surprised analysts, as they had anticipated a slowdown. The PMI Output Index, which measures the pace of economic expansion, reached 53.1 in September, up from 52.0 in August. A reading above 50 signifies growth.

Business activity accelerated at its strongest pace in over three years, defying expectations for a downturn. However, firms faced higher operating costs due to rising energy prices stemming from the Middle East conflict. Chris Williamson, S&P Global's chief business economist, noted the inflationary pressures and credited the resilience of economic growth.

Overall new orders surged at their fastest pace in over four years, fueled by a rise in exports, including intra-euro zone trade. Both the services and manufacturing sectors contributed to the expansion. The services PMI rose to 53.0 from 51.6, its highest in nearly a year, surpassing the poll's forecasted decline to 51.5. The manufacturing index remained steady at August's 52.7, while the output gauge increased to 53.4 from 53.3.

To meet the increased demand, firms hired more workers but encountered a spike in input costs due to the energy price surge from the US-Iran war. They managed to pass some of these costs onto customers. Earlier this month, the European Central Bank raised interest rates for the second time in 2023 to curb the energy-driven inflation rise, warning that price pressures could persist. Markets are pricing three more hikes by the end of June.

Despite the headwinds of geopolitical issues and rising prices, the economic growth's resilience could embolden the ECB to hike interest rates again before the year's end, suggesting an October hike is very likely, according to Williamson.