Eurozone September PMI Data and Economic Outlook

S&P Global published the Eurozone's leading Purchasing Managers Index (PMI) data for September. New orders indicated that the regional economy maintained its resilient course.

On the other hand, the increase in energy prices increased cost pressures and the strong demand raised concerns that inflationary pressures may become evident again.

According to the announced data, the Eurozone composite PMI, which was 52 in August, increased to 53.1 in September, reaching the highest level of approximately 3.5 years. The composite PMI rose to its highest level since April 2023, while private sector activity in the eurozone grew for the third consecutive month.

The service sector PMI in the Eurozone, which was 51.6 in August, reached 53 in September, reaching the highest level in the last 10 months. Manufacturing industry PMI maintained its level in August with 52.7 in September. The manufacturing industry production index also increased from 53.3 to 53.4, reaching the highest level in the last 55 months.

Data revealed that growth in both the services and manufacturing sectors in the Eurozone strengthened in September. New orders from companies in the region rose for the third consecutive month.

On the other hand, the increase in input costs and sales prices accelerated in September and reached the highest level in the last 4 months. In PMI data, values ​​of 50 and above indicate expansion in the sector, while values ​​below 50 indicate contraction.

Input and output prices recorded the fastest increase in the last 4 months

ING Group Chief Economist Peter Vanden Houte, in his evaluation to the AA correspondent on the subject, stated that the strong data in September, when energy prices increased significantly again, constituted a positive surprise.

In addition, Houte pointed out that the increase in new orders and employment indicates that the growth story continues to gain momentum and said, "The recovery in Germany seems to be gaining momentum with the support of increasing public defense and infrastructure expenditures." he said.

Houte stated that if the war in the Middle East does not escalate further, it seems possible that economic growth in the Eurozone will be around 1 percent this year, and that this rate will be a successful result, considering the negativities on a global scale.

However, Houte noted that the fact that labor markets are still relatively tight and demand remains increases the risk of second-round inflation effects, adding:

"PMI data indicate that both input and output prices recorded the fastest increase in the last 4 months. This indicates that the European Central Bank (ECB) needs to make additional monetary tightening. We expect another interest rate increase in December."

“The relatively weak performance of the manufacturing sector reflects the pressure created by high energy costs.”

Rabobank Senior Macrostrategist Stefan Koopman also stated that Eurozone PMI data show that the economy continues to perform strongly despite higher energy prices and the negative shock in the terms of trade.

Stating that the third quarter average of Composite PMI was 52.4, Koopman said, "This is well above the average of 49.1 in the second quarter." he said.

Koopman said that after the resilient performance at the beginning of the year, they expected growth to lose momentum in the summer months, but this resilient state has been maintained so far.

Stating that, in general, the survey revealed a picture consistent with the underlying growth of approximately 0.3 percent of Gross Domestic Product (GDP), Koopman stated that this was a positive development.

Koopman stated that Germany has a stronger performance than France when looked at on a country basis, and noted that while the German economy receives support from higher defense and infrastructure expenditures, the electrical engineering sector continues to benefit from artificial intelligence-related investments on a global scale.

Stating that the sectoral distribution throughout the Eurozone points to the strength in the service sector, Koopman made the following evaluations:

"While the Services PMI increased from 51.6 to 53, the manufacturing PMI data remained unchanged at 52.7. The relatively weak performance of the manufacturing sector probably reflects the pressure created by high energy costs. The fact that the Eurozone economy continues its resilient course somewhat reduces the possibility that the impact of high energy prices will be limited to headline inflation only. Stronger demand provides more opportunities for companies to pass on at least part of the increase in costs to consumers. This situation provides more opportunities for core inflation to pass on to consumers at least part of the increase in costs. "It coincides with its overall flattening over the course of a year and no longer sustaining the pronounced downward trend that policymakers in Frankfurt wanted to see."

Koopman stated that they expect the ECB to increase interest rates again in December and raise the deposit rate to 2.75 percent, and that this step will move monetary policy to a moderately tightening region. "Beyond that, additional tightening will be difficult to justify given the softening in the labor market and the limited evidence so far that the energy shock is reflected in broader underlying inflation," Koopman said. he said.

"ECB is more likely to raise interest rates in December"

Rabobank ECB and Eurozone Macro Strategy Head Elwin de Groot noted that economic activity recovered in the month in question despite the significant negativities arising from high energy prices, increasing interest rates and the volatile geopolitical environment in the PMI data announced today in the region.

Stating that production in the Eurozone recorded the fastest increase since April 2023, Groot reported that the activity in the services sector showed a strong recovery, increasing from 51.6 in August to 53, and the manufacturing production index reached 53.4, reaching its highest level in 55 months.

Groot noted that the increase in production was supported by new orders, which reached the strongest expansion rate since May 2022, according to S&P Global, especially supported by the rise in new export orders.

Therefore, Groot stated that, at first glance, September PMI data indicate that the economy has shown a remarkable resistance in the face of these negativities. "However, a recovery in input prices was also recorded in the survey. This trend seems likely to extend into the next month, considering the recent developments in the energy markets. In addition, there was a significant extension in the delivery times of suppliers. This points to ongoing and increasing problems in the supply chains. These problems are at least partially related to the Strait of Hormuz and Babülmandep. "It is likely to be linked to congestion at critical transit points, including the Strait." he said.

Groot noted that these two findings may also support the views of monetary policy makers that additional monetary tightening may be necessary if inflationary pressures do not ease in a short time and said, "For now, we maintain our view that it would be premature for the ECB to increase interest rates in October. In terms of timing, an interest rate increase in December seems more likely." he said.