Euro zone business activity displayed unexpected strength in August despite firms implementing price hikes, potentially dampening anticipations for two more rate reductions from the European Central Bank (ECB) in 2024.
Notably, the robust performance was influenced by a significant rise in French services activity linked to the Olympic Games, casting doubt on the sustainability of the upturn.
In contrast, German business activity declined for the second consecutive month, exceeding expectations.
Capital Economics’ Franziska Palmas noted that while the flash Purchasing Managers’ Index (PMI) for August appeared positive, much of the improvement stemmed from the Paris Olympics, signaling a potential slowdown in GDP growth for Q3. Palmas emphasized that with persistent price pressures, the ECB is likely to proceed cautiously.
HCOB’s preliminary composite PMI, compiled by S&P Global, surged to 51.2 this month, surpassing forecasts in a Reuters poll. This increase from July’s 50.2 suggests an expansion in economic activity, despite firms in the eurozone raising prices at a faster rate.
The composite output prices index climbed from 52.1 to 52.9, signaling heightened inflationary pressures.
Furthermore, unexpected inflation growth in July, coupled with a resilient labor market and stable economic conditions, may prompt ECB policymakers to hesitate in implementing further significant policy easing measures.
Following the deposit rate reduction in June, the ECB remained at a standstill in July, notwithstanding a Reuters survey hinting at two additional cuts later in the year.
