Business activity in the euro area expanded at the fastest pace since November 2025, according to preliminary Purchasing Managers' Index (PMI) data released on Friday. The composite PMI increased to 52.1 from 50.0 in July, surpassing the Reuters poll median forecast of 51.7. The reading signals a solid pickup in economic momentum following a 0.4% expansion in the second quarter.
Manufacturing activity led the acceleration, with the sector’s PMI rising to 52.8 from 51.9, outpacing the survey estimate of 51.8. The services PMI remained unchanged at 51.7, matching July’s level and defying concerns over softness in the sector after a subdued second quarter. The overall improvement reflects a broad-based rebound in new orders, particularly in manufacturing, alongside a resumption of export growth that has helped offset disruptions linked to geopolitical tensions in the Middle East.
Employment trends also showed signs of stabilization. Companies resumed hiring for the first time this year, with service sector job creation accelerating to its fastest pace in eight months. This follows three consecutive years of subdued labor market conditions, indicating a tentative shift toward broader economic normalization.
Price pressures continued to ease, though remained elevated by historical standards. Input cost inflation slowed to a six-month low, while output price inflation fell to its lowest level in five months. Despite these improvements, inflation remains a key concern for policymakers as the European Central Bank (ECB) prepares for its second interest rate hike of 2026, according to a Reuters poll published last week.
Chris Williamson, Chief Business Economist at S&P Global Market Intelligence, noted that industrial activity is once again the primary driver of growth, supported by services. He highlighted the role of precautionary stockpiling in sustaining manufacturing output amid ongoing supply chain disruptions in the Middle East. Williamson also pointed to rising demand for AI-related technology products and increased defense spending, particularly in Germany, as factors boosting production.
The preliminary PMI data suggests the euro area economy is on track for a stronger third quarter, with composite output growth pointing to a solid expansion. However, the combination of resilient growth, persistent inflation, and renewed hiring activity may reinforce expectations for the ECB to maintain a restrictive policy stance, leaving the door open for further rate increases in the coming months.
