Eurozone growth edges higher in September, reaching 16-month peak

The Eurozone economy experienced modest expansion in September, with the HCOB Composite PMI rising to a 16-month high of 51.2, primarily driven by the services sector and suggesting a 0.4% Q3 GDP growth. While inflation pressures moderated and business confidence improved, the recovery remains fragile, marked by a slight decline in employment, only marginal new business growth, and continued contraction in new export orders, keeping overall expansion below long-run trend rates.

Analysis

The Eurozone economy demonstrated a modest but continued expansion in September, with the HCOB Composite PMI Output Index reaching a 16-month high of 51.2. This fourth consecutive monthly increase, driven primarily by an acceleration in the services sector (PMI at 51.3), supports a Q3 GDP growth nowcast of 0.4%. Geographically, the recovery is uneven; Germany's rebound was a key driver and Spain recorded the strongest growth (53.8), while France remained in contractionary territory (48.1). However, the expansion's foundation appears fragile. Growth remains below the long-run trend of 52.4, new business saw only marginal improvement, and employment levels contracted for the first time since February. Furthermore, a persistent decline in new export orders, now extending over three-and-a-half years, signals significant weakness in external demand. While inflation pressures moderated, service sector price inflation remains above its long-term average, a factor the European Central Bank will monitor closely, potentially tempering expectations for a dovish policy shift.

Key Decisions for Investors

• Consider a selective allocation to Eurozone equities, favoring services-focused firms and markets with stronger momentum like Spain, while remaining cautious on export-heavy industrials due to contracting new export orders.
• Monitor upcoming Eurozone service sector inflation reports, as persistently elevated price pressures may cause the European Central Bank to delay potential rate cuts, impacting fixed-income valuations.
• The combination of slowing new business, a fractional decline in employment, and accelerated backlog depletion suggests a potential slowdown if demand does not materialize, warranting a focus on companies with strong order books and pricing power.