Eurozone Business Activity Hits 29-Month High Amid Rising Inflation

The Eurozone's business activity surged to a 29-month high in September, driven by robust demand that helped offset rising inflation concerns tied to the Middle East conflict. According to a private survey reported by Reuters, the S&P Global Eurozone Services Purchasing Managers' Index climbed to 53.0, its highest level in 10 months, while the composite PMI, which combines services and manufacturing, reached 53.1, the strongest reading since April 2023.

Despite the economic expansion, inflation accelerated more than expected, rising to 3.8% in September 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 for an extended period. The survey also highlighted renewed price pressures, with both input costs and business charges increasing at their fastest pace in four months.

Stronger demand supported the growth, with services companies reporting a faster increase in new business and export orders expanding after 39 consecutive months of contraction. Overall new orders grew at their fastest pace in 41 months, driven by robust overseas demand. However, employment growth remained weak, as a slowdown in services-sector hiring offset modest improvements in factory job creation.

The combination of stronger economic activity, rising energy costs, and accelerating price pressures is complicating the ECB's monetary policy outlook. Markets are currently pricing in more than two ECB interest-rate increases by mid-2024, reflecting concerns that policymakers may need to respond more aggressively if inflationary pressures persist.