Eurozone economic activity strengthened in August, with flash Purchasing Managers' Index (PMI) data exceeding forecasts, while inflation accelerated, strengthening the case for a European Central Bank (ECB) rate hike next month.
The eurozone composite flash PMI rose to 52.1 in August from 52.0 in July, surpassing Barclays' forecast of 51.7. The industrial production index increased to 52.8 from 51.9, while the underlying industrial PMI tracked by Barclays climbed 0.5 points to 53.4. Services PMI remained steady at 51.7, matching July's level and exceeding Barclays' estimate of 51.5. Country-level data showed divergence, with France's composite PMI falling 0.6 points to 48.8, Germany's dipping 0.3 points to 51.0, and the eurozone periphery accelerating 1.4 points to 55.8.
Headline inflation in the eurozone rose to 2.9% year-on-year in July, up from 2.8% in June, slightly above Barclays' forecast of 2.92%. Monthly inflation increased by 0.21%, compared with Barclays' projection of 0.19%. Core inflation held steady at 2.5% y/y, unchanged from June. Energy inflation surged 1.8 percentage points to 10.3% y/y, driven by higher fuel, gas, and electricity prices.
Barclays expects headline inflation to climb further to 3.4% y/y in August, with core inflation remaining at 2.5%. The bank projects headline inflation to peak at 3.6% y/y in Q4 2026 before easing toward the ECB's 2% target throughout 2027. Negotiated wage growth slowed to 2.4% y/y in Q2, down from 2.6% in Q1.
Business sentiment in France improved, with the INSEE business climate indicator rising to 98.1 in August from 97.3 in July, marking the third consecutive monthly increase. Eurozone consumer confidence edged up by 0.4 points to -15.5.
Barclays maintains its view that the ECB will raise interest rates by 25 basis points at its September meeting, followed by a pause. The bank warns that risks remain skewed toward a more restrictive stance if energy prices do not stabilize soon.
