Eurozone Business Growth Hits 3-1/2-Year High Amid Inflation Fears

Eurozone business activity surged to its highest level in nearly three-and-a-half years in September, defying concerns over inflation fueled by the Middle East conflict. A private survey revealed that demand remained robust, despite rising energy costs pushing inflation up to 3.8 percent in September from 3.2 percent in August. This unexpected jump has increased speculation that the European Central Bank (ECB) may raise interest rates more aggressively than previously anticipated.

The S&P Global Eurozone Services PMI climbed to a 10-month high of 53.0 in September, up from 51.6 in August, aligning with earlier estimates. The composite index, which combines services and manufacturing, also hit its highest point since April 2023, marking the strongest quarterly performance since the second quarter of 2022. A reading above 50.0 indicates economic growth.

Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that the PMI surveys suggest GDP growth of 0.4 percent quarterly, with accelerating momentum heading into the fourth quarter. He highlighted that IT-related services, particularly those driven by AI investments, are experiencing strong growth across the eurozone. Spain led the performance, followed by Ireland, while Germany’s recovery gained traction. Italy and France saw modest growth.

The survey also indicated intensifying inflation pressures, with both input and output prices rising at their fastest pace in four months. Williamson suggested that eurozone inflation may hover closer to 4 percent than the ECB’s 2 percent target. This data, combined with the growth acceleration, has fueled expectations of further aggressive monetary policy tightening. Markets are currently pricing in more than two ECB rate hikes by mid-next year.