Eurozone business growth hits highest level in three years amid inflation surge

The Eurozone's business activity surged to its highest level in nearly three and a half years in September, defying inflation concerns tied to the Middle East conflict. The S&P Global Eurozone Services PMI climbed to a 10-month high of 53, up from 51.6 in August, while the composite index, combining services and manufacturing, reached 53.1, its strongest showing since April 2023. Spain led the growth, followed by Ireland, with Germany also seeing a significant acceleration in recovery. Italy and France recorded more modest gains.

Despite rising energy costs pushing inflation to 3.8% in September from 3.2% in August, business expansion remained robust. The European Central Bank (ECB) may raise interest rates higher than anticipated, though this has yet to dampen economic activity. The PMI data suggests a quarterly GDP growth rate of 0.4%, with IT-related services, AI investments, and commercial services driving much of the momentum.

New business orders grew at their fastest pace in 41 months, with export orders breaking a 39-month contraction streak. However, services hiring slowed, offsetting modest job gains in manufacturing, leaving overall employment growth weaker. Business confidence held steady, but inflation pressures intensified, with input and output prices rising at their fastest pace in four months.

Chris Williamson, chief business economist at S&P Global Market Intelligence, noted that the survey signals Eurozone inflation running closer to 4% than the ECB's 2% target. This data is likely to fuel speculation of more aggressive monetary policy tightening, with markets pricing in over two ECB rate hikes by mid-2024.