Europe’s economy is showing greater resilience than expected despite rising energy costs and disruptions linked to conflicts in the Middle East and Ukraine, with business activity across the euro zone accelerating sharply in September.
The euro zone’s private sector expanded at its fastest pace in more than three years, according to the latest S&P Global business survey. The improvement was broad based, with both manufacturing and services contributing to stronger activity.
The S&P Global Flash Euro Zone Composite PMI Output Index rose to 53.1 in September from 52.0 in August. A reading above 50 indicates that business activity is expanding.
The result was significantly stronger than expectations for a decline to 51.7, suggesting that companies across the currency bloc have so far absorbed much of the pressure created by higher energy prices and supply chain disruptions.
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The stronger than expected figures have also raised questions about how long the European economy can maintain its momentum as energy costs continue to put pressure on businesses and consumers.
Germany and France Show Stronger Activity
The recovery was visible across several major European economies.
Germany, the region’s largest economy, recorded solid growth in September despite increasing inflationary pressures facing businesses.
France also recorded stronger activity, with growth reaching its fastest pace in more than two years as demand for services rebounded.
The improvement in the two largest euro zone economies is significant because both have faced persistent economic challenges in recent years. Stronger business activity could provide support for wider euro zone growth if the trend continues.
The picture was less positive in Britain, which is outside the European Union. Business activity slowed in September while inflationary pressures increased, creating a more difficult environment for the government ahead of its upcoming budget.
Demand and Trade Support Growth
New orders across the euro zone increased at their fastest pace in more than four years, supported by stronger exports and increased trade within the currency bloc.
Services activity also improved sharply, reaching its highest level in almost a year and exceeding expectations. Manufacturing activity, meanwhile, remained broadly stable.
Companies responded to stronger demand by increasing hiring, suggesting that the improvement in business activity is beginning to translate into stronger employment.
But higher energy costs remain a major concern.
Firms reported rising input costs as energy prices increased following the US war with Iran. Some companies were able to pass those additional costs on to customers, contributing to renewed inflationary pressure.
The combination of stronger growth and higher prices presents a difficult policy environment for the European Central Bank.
ECB Faces a Difficult Balance
The latest data could make monetary policy decisions more complicated for the ECB.
The central bank has already raised interest rates twice this year in response to rising inflation linked to higher energy costs. It has also warned that inflationary pressures could prove more persistent than previously expected.
The stronger business surveys suggest that the euro zone economy may be able to withstand higher borrowing costs better than previously anticipated.
At the same time, rising input and output prices could make it more difficult for policymakers to ease monetary conditions if inflation continues to spread through the wider economy.
Markets are currently pricing in three additional ECB rate increases by the end of June 2027.
The latest PMI figures have strengthened expectations that further monetary tightening could remain on the table, particularly if economic growth continues alongside elevated inflation.
Resilience Under Pressure
The September data offer a more positive picture of Europe’s economy than many forecasts had suggested. Stronger services activity, resilient manufacturing, rising orders and increased hiring indicate that businesses have continued to operate despite the energy shock.
But the resilience remains vulnerable to developments in global energy markets.
If energy prices remain elevated for an extended period, companies could face increasingly difficult choices over investment, hiring and prices. Households could also experience further pressure on purchasing power.
For now, however, Europe’s economy appears to be absorbing the shock better than expected. The challenge for policymakers will be determining whether the September acceleration represents a durable improvement or a temporary reprieve before higher energy costs begin to weigh more heavily on growth.
With information from Reuters.
