Europe's Economy Defies Energy Price Shocks with Surprising Resilience

Europe's economy has shown unexpected resilience in the face of energy price shocks and rising inflation, according to recent business surveys. The S&P Global Flash Euro Zone Composite PMI Output Index jumped to 53.1 in September from August's 52.0, defying expectations for a dip to 51.7.

The surge in business activity was broad-based across both the manufacturing and service sectors, with solid growth registered across geographies covered by S&P Global's data. Germany and France showed strength, with business activity in Germany expanding despite firms facing increased inflationary pressures, while in France it grew at its fastest pace in just over two years.

The UK, however, faced slower growth as inflation pressure built, making an awkward backdrop for finance minister John Healey ahead of his first budget next month. Despite rising input costs due to elevated energy prices stemming from the US war with Iran, firms were able to pass some of this on to customers and took on more staff.

The European Central Bank raised interest rates for the second time this year in response to energy-driven inflation and warned that additional rate hikes may be necessary. Markets are pricing in two to three additional ECB rate hikes by early/mid-2027 to tame inflation pressures, with expectations of the deposit rate reaching around 2.75%, 3.0%.