Euro Area Business Activity Holds Steady in August, Reinforcing ECB Policy Path
Key Takeaways
- •The eurozone August final composite PMI stood at 52.0, unchanged from July, sustaining the fastest private sector growth pace in eight months.
- •Spain and Italy expanded comfortably above 50, with Italy's services PMI rising to 55.2 from 52.5, while France remained in contraction and Germany's services PMI slipped to 49.7.
- •Euro area employment expanded for the first time in 2023 to date, supported by broad-based sales growth and the joint-strongest demand improvement since November.
- •Input cost pressures eased fractionally and output price inflation matched July's pace, but inflation remained historically high and above pre-US-Iran conflict levels.
- •The ECB is expected to raise interest rates again this month, with markets focused on its upcoming policy meeting and staff projections.
Today's euro area PMI releases provided a broad picture of business conditions across the region in August:
- Spain August services PMI: 57.8 (previously 58.3)
- Spain August composite PMI: 55.8 (previously 56.5)
- Italy August services PMI: 55.2 (previously 52.5)
- Italy August composite PMI: 53.6 (previously 52.5)
- France August final services PMI: 48.0 (previously 49.6)
- France August final composite PMI: 48.5 (previously 49.4)
- Germany August final services PMI: 49.7 (previously 49.8)
- Germany August final composite PMI: 51.8 (previously 51.3)
- Eurozone August final services PMI: 51.6 (previously 51.7)
- Eurozone August final composite PMI: 52.0 (previously 52.0)
The country breakdown highlights the two-speed nature of the euro area recovery: Spain and Italy continued to post comfortably above the 50 mark that separates expansion from contraction, with Italy's services sector accelerating notably from July. France, by contrast, remained in contraction on both measures, while Germany's services activity slipped marginally below 50 even as its composite output stayed in growth territory. The euro area-wide readings, which aggregate these national pictures, sit just above the 50 threshold.
At the euro area level, the headline figures indicate that private sector business activity growth matched the pace seen in July, which itself was the fastest in eight months.
Beneath the headline numbers, both output and new order inflows rose at the same solid pace recorded in July, and the August improvement in demand was the joint-strongest since November last year. Employment also expanded for the first time in the year-to-date, supported by another month of solid and broad-based sales growth.
On the price front, pressures were again more stable. Input cost pressures eased fractionally, while output prices increased at the same pace as in July. Even so, inflation rates remained high by historical standards and stood above the levels seen immediately prior to the US-Iran conflict.
This continues to signal that inflation risks are still present, though they are not spiraling out of control for now. However, with the US-Iran conflict persisting for longer, the risk that higher price pressures become more embedded in inflation expectations is something the ECB will have to monitor closely.
PMI surveys are closely watched by policymakers and analysts as early, forward-looking indicators of economic momentum because they are released before most official hard data, such as GDP or industrial output statistics, and track the same month they cover.
Against that backdrop, the central bank is expected to raise interest rates again this month in order to position itself better for the inflation battle ahead, and today's data is unlikely to distract from that course. The next focal points for markets will be the ECB's upcoming policy meeting and its accompanying staff projections, which will show how officials weigh the combination of steady growth and still-elevated inflation against the tightening already delivered.
