By Indradip Ghosh
BENGALURU, Oct 5 (Reuters) – Euro zone business activity expanded at its fastest pace in nearly 3-1/2 years in September, driven by strong demand despite inflation concerns related to the Middle East war. A private survey indicated a rise in price pressures as well.
Inflation surged more than expected to 3.8% last month from 3.2% in August, primarily due to rising energy costs, increasing the likelihood of the European Central Bank (ECB) adopting a more aggressive stance on interest rate hikes.
Despite this, along with a recent increase in bond yields, activity has remained robust. The S&P Global Eurozone Services PMI climbed to a 10-month high of 53.0 in September from August’s 51.6, aligning with preliminary estimates. The composite index, which fuses services and manufacturing, also rose to 53.1 from 52.0 in August, marking its highest level since April 2023 and showcasing the strongest quarterly performance for the bloc since Q2 2022.
A PMI reading above 50 indicates growth. Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that the overall indication from the PMI surveys reflects GDP growth at a quarterly rate of 0.4%, with momentum expected to accelerate into the fourth quarter.
Growth drivers varied across countries, but IT-related services showed particularly strong growth, bolstered by AI investments and support from professional and commercial services. Spain led the performance, followed by Ireland, with Germany’s recovery reaching one of its strongest rates since early 2022. Italy and France saw modest growth.
DATA UNDERPIN ECB RATE HIKE BETS
Services firms reported an uptick in new business, a crucial demand gauge, with export orders breaking a 39-month streak of contraction. The rise in factory orders was the strongest since early 2022, contributing to an overall increase in new orders at the fastest rate in 41 months. Foreign demand surged, with overseas orders climbing at the quickest rate in over 4-1/2 years.
A slowdown in service sector hiring slightly countered a modest uptick in factory job creation, resulting in weaker overall employment growth. Yet, business sentiment remained steady. The survey highlighted intensifying inflation pressures, with both input and output prices increasing at their fastest pace in four months.
Williamson remarked, “A renewed upturn in price pressures signals euro zone inflation closer to 4% than the ECB’s 2% target,” adding that this, combined with accelerating growth, would likely lead to speculation of bolder monetary policy adjustments.
Current market expectations indicate more than two ECB rate hikes by mid-next year.
(Reporting by Indradip Ghosh; Editing by Toby Chopra)
