Euro area business activity gathered further momentum in August, according to flash PMI estimates, with both the services and manufacturing sectors beating consensus expectations despite softer readings from France and Germany.

The headline figures:

• August flash services PMI: 51.7 versus 51.5 expected; the July reading was 51.7.
• August flash manufacturing PMI: 52.8 versus 51.8 expected; the July reading was 51.9.
• August flash composite PMI: 52.1 versus 51.7 expected; the July reading was 52.0.

On the Purchasing Managers' Index scale, readings above 50 signal month-on-month expansion in activity while readings below 50 indicate contraction, so all three headline indices point to growth. The composite index blends the manufacturing and services surveys into a single gauge of private-sector conditions. As flash estimates — compiled from around 85% of the survey's usual responses — they provide the earliest snapshot of euro area business conditions each month and are closely watched by policymakers and markets ahead of official growth and inflation data.

The results came as a surprise following the earlier misses from France and Germany, Europe's two largest economies — especially the services sector estimate. The pace of expansion in services was unchanged from July, but it still came in better than the readings from France and Germany, with growth elsewhere in the region picking up considerably.

Manufacturing also performed well. The sector index climbed to a 51-month high, its strongest level in more than four years, while manufacturing output reached a 54-month high in August.

Taken together, a further rise in both output and new orders, along with the first expansion in new export business in roughly four-and-a-half years, helped bolster private sector activity in Q2. For the European Central Bank, the readings help ease further stagflation concerns, even if France and Germany in particular are likely to come under more scrutiny in the months ahead.

On price pressures, input cost inflation eased to its weakest since February but remained sharp, and was still some way above the levels seen before the Middle East conflict started.

S&P Global's accompanying commentary noted:

"A sustained solid rise in business activity in August sets the eurozone up for a robust increase in third quarter GDP of around 0.3%. The manufacturing sector is again the star performer, enjoying its strongest growth for four-and-a-half years, with the services economy providing a supporting role, notching up another month of decent growth after the malaise seen in the second quarter.

"We are again seeing reports of precautionary stock building helping support the goods-producing sector amid the ongoing supply chain disruptions emanating out of the Middle East, with supply chain delays again remaining worryingly widespread in August. However, there are also encouraging signs of rising demand for AI-related tech goods and rising equipment demand thanks to higher defence spending, notably helping Germany in particular achieve increasingly impressive production gains.

"In the service sector, rising tourism spending is helping boost economic growth, notably outside of France and Germany, where the region collectively saw the fastest services growth for over three years.

"Although high prices reportedly continue to dampen demand, price pressures have shown signs of further easing. Policymakers will be especially encouraged to see services selling price inflation back down to the joint-lowest so far this year (alongside March), with goods price inflation also continuing to moderate. However, with the flash PMI signalling solid third quarter GDP growth, a return to hiring by companies for the first time this year, and inflation remaining elevated by historical standards, a hawkish bias is likely to be maintained and further imminent rate hikes cannot be ruled out."

The final PMI estimates, due early next month, will show whether the flash picture holds, while the divergence between France and Germany and the rest of the bloc — and how the ECB weighs firmer growth against still-elevated inflation — will remain in focus in the months ahead.

Source: ForexLive