Eurozone Business Activity Hits 3-1/2 Year High Amid Inflation Concerns

Eurozone business activity surged to its highest level in over three and a half years in September, despite ongoing concerns about inflation driven by the Middle East conflict. The S&P Global Eurozone Services PMI rose to 53.0, a 10-month high, while the composite index, which includes both services and manufacturing, climbed to 53.1, marking the strongest quarterly performance since early 2022. Spain led the growth, followed by Ireland, while Germany saw a notable recovery. Italy and France reported modest growth.

The data suggests that the Eurozone GDP is growing at an annualized rate of 0.4%, with momentum expected to accelerate into the fourth quarter. Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that IT-related services, particularly those driven by AI investments, are contributing significantly to this growth. Export orders also broke a 39-month streak of contraction, indicating strong foreign demand.

However, inflation pressures intensified, with both input and output prices rising at their fastest pace in four months. This has raised concerns that Eurozone inflation could approach 4%, well above the European Central Bank’s 2% target. The data has fueled speculation that the ECB may implement more aggressive monetary policy tightening, with markets pricing in more than two rate hikes by mid-2025.

Despite these inflation worries, business confidence remained steady, though overall employment growth weakened due to a slowdown in services hiring. The survey underscores a resilient economic expansion in the Eurozone, even as central banks navigate the challenges posed by rising energy costs and geopolitical tensions.