The euro area composite PMI rose to 53.1 in September, a 41-month high, with both manufacturing and services remaining comfortably in expansion territory. It was a notable upside surprise relative to the consensus for a small deterioration. The headline indices improved in both Germany and France, suggesting broad resilience to the energy price shock.
By sector, the manufacturing sector has remained in reasonable shape since the start of the US-Iran conflict, supported by strong AI-related capex demand and increased European defence spending. New orders rose to 52.3, the highest since March 2022, pointing to continued momentum. More notable was the improvement in services sentiment, with the services PMI rising to a 10-month high, despite higher energy prices. While encouraging, we would caution that the end to summer heatwave disruption may have provided a temporary boost to activity. Separate data yesterday showed that euro area consumer confidence data weakened in September which could indicate rising pressure on household purchasing power.
We are tracking euro area GDP growth (ex. Ireland) at around 0.2% Q/Q in Q3. The September PMI is consistent with stronger growth (~0.4%). However, activity earlier in the quarter was likely held back by heatwave-related disruption, including low Rhine water levels (see here). Looking ahead, we have pencilled in a similar (i.e. relatively modest) growth rate in Q4, with headwinds from political/fiscal uncertainty and elevated energy pricing (see e.g. here). Still, the broad resilience of the euro area economy so far to the energy shock, higher interest rates and supply chain disruption is unarguable. Annual average growth of 1.0% this year, our base case, would certainly be a good result given the circumstances.