Euro zone business activity has risen to its highest level in more than three and a half years, according to closely watched PMI survey data, offering fresh evidence that the currency bloc's private sector is regaining momentum even as inflationary pressures continue to build.
The flash composite purchasing managers' index, which tracks activity across services and manufacturing, climbed further into expansion territory, signalling that companies across the 20-nation euro area are increasing output at a pace not seen since early 2022. The reading points to broad-based growth rather than a rebound confined to a single sector or member state.
The improvement comes despite persistent worries about inflation, which remains above the European Central Bank's 2 per cent target in several economies. Firms reported that input costs continued to rise, with services providers in particular facing higher wage bills and energy-related expenses. That combination of stronger demand and sticky price pressures complicates the ECB's calculus as it weighs the pace of future interest rate decisions.
Manufacturing, which has lagged behind services for much of the post-pandemic period, showed signs of stabilising. New orders picked up, and business confidence improved, suggesting that the drag from weak global trade and elevated borrowing costs may be easing. The survey's employment component also pointed to continued hiring, though at a moderate pace.
Economists cautioned that the headline figure masks divergence between member states. Germany, the bloc's largest economy, has been slow to recover from its industrial downturn, while southern European economies such as Spain and Italy have outperformed. France, meanwhile, continues to grapple with political uncertainty that has weighed on business sentiment.
The PMI data will feed into the ECB's assessment of whether the euro zone can sustain a soft landing, in which inflation returns to target without a sharp rise in unemployment. Policymakers have repeatedly stressed that they will proceed meeting by meeting, relying on incoming data rather than pre-committing to a rate path.
Financial markets reacted modestly to the release, with the euro holding steady against the dollar and government bond yields little changed. Analysts noted that while the growth uptick is welcome, it may also give the ECB less reason to cut rates aggressively if inflation proves stubborn.
Looking ahead, the key question is whether the current expansion can continue without reigniting price pressures. Much will depend on wage growth, energy costs and the trajectory of global demand. For now, the PMI survey suggests the euro zone economy is in better shape than many feared at the start of the year, but the inflation challenge is far from resolved.