Eurozone Business Activity Hits 29-Month High Amid Rising Inflation

The Eurozone's business activity surged to its highest level in 29 months during September, fueled by robust service demand and investments in artificial intelligence. The economic expansion was strong enough to counterbalance rising inflation concerns tied to the war in the Middle East. According to a private survey reported by Reuters, the S&P Global Eurozone Services Purchasing Managers' Index rose to 53.0 in September, up from 51.6 in August, marking its highest level in a decade.

Despite the economic growth, inflation in the Eurozone accelerated more than expected to 3.8% in September, up from 3.2% in August, primarily due to soaring energy costs. This increase has heightened expectations that the European Central Bank (ECB) may maintain higher interest rates or even hike them further by mid-next year. The composite PMI, which combines services and manufacturing, climbed to 53.1 from 52.0, reaching its highest level since April 2023.

Spain remained the strongest-performing major economy in the survey, followed by Ireland. Germany's recovery also accelerated, reaching one of its strongest rates since early 2022. Italy and France, however, posted more modest growth. The survey highlighted strengthening economic momentum as the bloc entered the fourth quarter, with IT-related services and AI investments among the strongest areas of growth.

Services companies reported a faster increase in new business, suggesting resilient underlying demand. Export orders in the services sector expanded after 39 consecutive months of contraction. Combined with the strongest increase in factory orders since early 2022, overall new orders grew at their fastest pace in 41 months. Overseas demand was particularly robust, with export orders rising at their fastest rate in more than four-and-a-half years.

The improvement in activity did not translate into a comparable increase in employment. A slowdown in services-sector hiring offset a modest improvement in factory job creation, resulting in weaker overall employment growth. Business confidence remained broadly stable despite the stronger activity and mounting inflation concerns.

The survey also highlighted renewed price pressures across the Eurozone. Both input costs and prices charged by businesses increased at their fastest pace in four months. This acceleration in prices could reinforce concerns that inflation may remain closer to 4% than the ECB's 2% target. The combination of stronger-than-expected economic activity, rising energy costs, and accelerating price pressures is complicating the ECB's monetary policy outlook.