Euro zone business activity posts surprise upturn, PMI shows

Business activity in the euro zone surged unexpectedly in September, marking its fastest pace in nearly three years, according to a survey by S&P Global. The Composite Purchasing Managers' Index (PMI) Output surged to 53.1, surpassing expectations of a decline and marking the highest level since April 2023. This indicates an expansion in economic activity across the region.

The PMI, which must exceed 50.0 to signal growth, reflects the strength of new orders, which surged to their fastest rate in over four years. This growth was driven by rising exports, including intra-euro zone trade.

The services sector, in particular, showed impressive resilience, with its PMI rising to 53.0 from 51.6, its highest level in nearly a year. The manufacturing sector also contributed to the expansion, maintaining the same level as August at 52.7, but the output gauge increased to 53.4 from 53.3.

Despite the economic upturn, firms faced higher operating costs due to rising energy prices resulting from tensions in the Middle East. Firms responded by hiring more staff but were able to pass some of these costs onto customers. Earlier this month, the European Central Bank (ECB) raised interest rates for the second time this year to curb inflation driven by energy costs.

The ECB has warned that rising price pressures could persist. Financial markets are pricing in three more interest rate hikes by the end of June. The resilience of economic growth in the face of geopolitical issues and rising prices, Williamson, chief business economist at S&P Global, noted, could embolden the ECB to raise interest rates again before the end of the year, potentially leading to an October hike.