Business activity across the euro zone picked up pace in August, reaching its strongest level since November, according to the latest S&P Global flash Purchasing Managers’ Index (PMI). The figures point to a more resilient European economy than many had expected, with stronger demand for goods and a return to growth in export orders providing a boost to businesses.
The S&P Global Flash Euro zone Composite PMI Output Index rose to 52.1 in August from 52.0 in July. A reading above 50 indicates that private-sector activity is expanding, while a reading below 50 signals contraction. The August figure was also better than the 51.7 level expected by economists in a Reuters poll.
One of the biggest improvements came from the manufacturing sector. The euro zone manufacturing PMI climbed to 52.8, its highest level in more than four years. Factory output benefited from a strong increase in new orders, suggesting that demand for manufactured goods is beginning to improve after a difficult period for European industry.
New orders across the private sector also recorded their strongest increase in around 40 months. More encouragingly, export orders increased for the first time since Russia’s invasion of Ukraine in February 2022. The improvement in international demand could give European manufacturers some much-needed support as they deal with high energy costs, supply-chain disruptions and uncertainty in global markets.
The services sector continued to expand as well, although its performance was less impressive than manufacturing. Services activity remained at 51.7, showing continued growth but little change from the previous month. This suggests that the current recovery is being led more strongly by factories and goods-producing businesses than by Europe’s large services economy.
Germany, Europe’s biggest economy, was an important part of the manufacturing improvement. German manufacturing activity rose sharply, while the country’s overall private-sector economy recorded modest growth. However, services remained under pressure, showing that the recovery is not evenly spread across all parts of the economy. France faced a weaker performance, with services activity affected by disruptions including a severe heatwave.
There was also some positive news on employment. Euro zone companies increased hiring for the first time this year, supported by renewed recruitment in manufacturing and stronger employment growth in services. A healthier job market could help consumer spending and provide additional support for the region’s economic recovery.
Another notable development was a slowdown in price pressures. Businesses reported that both input-cost growth and output-price inflation eased to multi-month lows. This could be encouraging for the European Central Bank as it tries to balance economic growth with its fight against inflation. However, inflation remains above the ECB’s 2% target, meaning policymakers are likely to remain cautious about future interest-rate decisions.
Despite the stronger business figures, companies are not completely confident about the months ahead. Business sentiment weakened and remained below its long-term average. Geopolitical tensions, energy-market risks and uncertainty surrounding inflation continue to weigh on expectations.
Still, the August PMI data offer a positive signal for the euro zone economy. The region grew by 0.4% in the second quarter, and the latest figures suggest that growth may continue into the third quarter. The combination of stronger manufacturing, rising orders, improving exports and easing price pressures gives businesses a better foundation heading into the final months of the year.
For investors and policymakers, the latest figures provide some reassurance that Europe’s economy is holding up despite difficult global conditions. The key question now is whether the improvement in manufacturing and new orders can continue and translate into stronger overall economic growth in the months ahead.
