Eurozone economic momentum strengthened in August as the composite flash Purchasing Managers' Index (PMI) rose to 52.1 from 52 in July, exceeding Barclays' forecast of 51.7 and signaling continued expansion.
Manufacturing output expanded at the fastest pace in three months, with the manufacturing output index climbing to 52.8 from 51.9 in July. The underlying manufacturing PMI, tracked by Barclays, increased by 0.5 points to 53.4. Services activity remained steady, with the services flash PMI holding at 51.7, matching July's reading and surpassing Barclays' expectation of 51.5.
Regional divergences persisted, however. France's composite PMI fell 0.6 points to 48.8, indicating contraction, while Germany's composite PMI eased 0.3 points to 51. The euro area periphery—excluding France and Germany—accelerated 1.4 points to 55.8, the highest level since early 2023. France's business climate indicator, reported by INSEE, rose for a third consecutive month to 98.1 from 97.3 in July.
Inflation pressures remained a key concern. Final July headline inflation was confirmed at 2.9% year-on-year, up from 2.8% in June and slightly above Barclays' 2.92% forecast. Month-on-month inflation rose 0.21%, compared with Barclays' 0.19% estimate. Energy inflation surged 1.8 percentage points to 10.3% year-on-year, driven by higher fuel, gas, and electricity prices, which contributed to the pickup in headline inflation. Core inflation held steady at 2.5% year-on-year and was flat month-on-month at -0.03%.
Barclays expects headline inflation to accelerate further in August, rising 0.5 percentage point to 3.4% year-on-year, while core inflation is projected to remain unchanged at 2.5%. The bank forecasts headline inflation to peak at 3.6% year-on-year in Q4 2026 before gradually easing toward the ECB's 2% target in 2027.
Consumer confidence showed modest improvement in August, with the flash estimate rising 0.4 points to -15.5 despite elevated pump prices. Negotiated wage growth slowed to 2.4% year-on-year in Q2, down 0.2 percentage point from Q1.
Barclays maintains its call for a 25 basis point ECB rate hike in September, with policy expected to remain on hold thereafter. The bank noted that risks remain skewed toward a more restrictive stance if energy prices fail to stabilize.
"With activity holding firm, inflation set to accelerate further and energy market developments showing little sign of relief, we continue to expect the ECB to raise rates by 25bp at its September meeting," Barclays said in a note.
