Euro area: PMIs point to stronger Q3 growth
|Economic activity in the euro area continues to grow slowly, amid mixed signals from the manufacturing and services sector. The euro area September PMI data presented a mixed picture, with manufacturing declining to 49.8 from 50.6 while services rose to 51.3 from 50.5. Manufacturing, which had been strong since early 2025, is now slowing, partly due to the reversal of front-loading effects to the US observed in the first half of the year. However, the positive development in the service sector suggests that domestic demand remains resilient. Notably, Germany recorded a modest increase, while Spain and Italy also recording rising services PMIs in September, reflecting a broader support for the growth in services. We forecast euro area GDP growth at 0.1% q/q in both Q3 and Q4, but the September PMIs suggest growth might even be a bit stronger in Q3.
Inflation in the euro area increased to 2.2% y/y in September, up from 2.0% y/y. The increase was expected as base effects on energy prices drove up energy inflation in September, which is visible as core inflation held steady at 2.3% y/y. Given the base effects on annual data, attention shifted to the monthly momentum in underlying inflation, where core inflation rose 0.2% m/m (s.a.), consistent with pace the past two months. This indicates a continuation of recent inflation developments and should thus not have changed the view of inflation in the ECB. We expect euro area inflation to average 2.1% in Q4 before falling below target, averaging 1.8% y/y in 2026.
As expected, the ECB kept the policy rate unchanged at 2.00% at September’s meeting. Focus was on the new staff projections, which lowered the 2027 core inflation forecast to 1.8% y/y (from 1.9%) and headline inflation to 1.9% y/y (from 2.0%), prompting an initially dovish market reaction. However, Lagarde downplayed these revisions as minor and attributed them to a stronger euro, adopting a hawkish tone at the press conference. Comments from other ECB members have also downplayed the undershooting of inflation. Hence, the sentiment is still manifesting that the current rate is the appropriate and we would need to see a significant deterioration in the economic outlook at get an extra cut. ECB focus on the growth outlook where private consumption is supported by rising real disposable incomes, lower inflation, and higher wages, along with improved household financials due to lower interest expenses. Especially the outlook for fiscal easing from Germany and rising defence spending continues to prompt a reluctance to further rate cuts.
In September, the Draghi report on European Competitiveness celebrated it’s one year anniversary, but in our view, there is not much to celebrate. We published a deep dive in which we argue that only 20% of Draghi’s investment target will be reached, see Deep Dive Euro Area: European investments to rise by 1 percent of GDP, 12 September. However, there are encouraging signs; On 1 October, 28 of Europe’s largest companies pledged to increase their investment levels in Europe by 50% by 2030. This commitment, however, is contingent on EU politicians delivering the necessary deregulations to boost Europe’s competitiveness and innovation.
Information on these pages contains forward-looking statements that involve risks and uncertainties. Markets and instruments profiled on this page are for informational purposes only and should not in any way come across as a recommendation to buy or sell in these assets. You should do your own thorough research before making any investment decisions. FXStreet does not in any way guarantee that this information is free from mistakes, errors, or material misstatements. It also does not guarantee that this information is of a timely nature. Investing in Open Markets involves a great deal of risk, including the loss of all or a portion of your investment, as well as emotional distress. All risks, losses and costs associated with investing, including total loss of principal, are your responsibility. The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of FXStreet nor its advertisers.