Eurozone Growth Gets a German Boost

The eurozone economy demonstrated greater resilience than investors anticipated in September, with business activity accelerating notably due to improvements in Germany and France. However, this stronger growth came with renewed price pressure, prompting the European Central Bank to maintain higher interest rates following their 25-basis-point hike earlier in the month.

The flash eurozone composite PMI rose to 53.1 in September, surpassing the expected 51.7 and reaching its highest level since April 2023. This marked the third consecutive month of expansion across the bloc's private sector.

Services sector activity surged, with the index reaching 53.0, a 10-month high, while manufacturing remained in expansion territory at 52.7. The boost in German business activity was particularly significant, with the country's composite PMI jumping to 53.8 from 51.8, the strongest reading in nearly a year. German services returned to growth after five months of contraction, and manufacturing remained robust even though its PMI slightly eased to 53.8.

France also showed signs of recovery, marking the first growth in 10 months. Demand strengthened, with new orders increasing at their fastest pace since May 2022, backlogs rising for the first time since June 2022, and companies adding staff for another month. However, higher input costs and selling prices, driven by increased fuel, energy, and supply-chain costs, posed a challenge.

The PMI numbers underscored Europe's resilience, but also complicated the ECB's inflation decision-making. With inflation expected to average 3% this year and remain above target through 2028, investors closely watched the next inflation releases to gauge the impact of higher energy costs on broader price levels. Germany's economic rebound was a key driver of the broader eurozone improvement, indicating that the region's largest economy might finally be contributing more meaningful growth after years of industrial weakness.