Eurozone business activity remained resilient in August, strengthening expectations that the European Central Bank could raise interest rates again in September.
The flash Eurozone Composite Purchasing Managers’ Index (PMI) increased to 52.1 in August, slightly above Barclays’ forecast of 51.7 and July’s reading of 52.0. Stronger manufacturing activity helped compensate for relatively flat growth in the services sector.
Following the latest data, Barclays maintained its forecast for a 25-basis-point ECB rate hike at the September meeting.
Eurozone Manufacturing Activity Strengthens
Manufacturing provided much of the improvement in August.
The flash manufacturing output index climbed to 52.8, beating Barclays’ 51.8 estimate and improving from 51.9 in July.
Meanwhile, the underlying manufacturing PMI measure monitored by Barclays increased by 0.5 points to 53.4, highlighting stronger momentum across the industrial sector.
Services activity was more stable. The flash services PMI remained unchanged at 51.7, although it still came in slightly above Barclays’ forecast of 51.5.
Germany and France Lag Behind Other Eurozone Economies
Economic performance varied significantly across the euro area.
France’s composite PMI slipped by 0.6 points to 48.8, keeping activity below the 50 level that separates expansion from contraction.
Germany’s composite PMI also declined, falling 0.3 points to 51.0.
However, the rest of the eurozone performed considerably better. Countries outside Germany and France recorded a 1.4-point increase in their composite PMI to 55.8, suggesting stronger growth across peripheral economies.
Eurozone Inflation Rises to 2.9%
Final July inflation figures confirmed that eurozone headline inflation increased to 2.9% year-on-year, compared with 2.8% in June.
Monthly inflation came in at 0.21%, slightly higher than Barclays’ forecast of 0.19%.
Core inflation, which excludes more volatile components such as energy and food, remained at 2.5% year-on-year. On a monthly basis, core prices declined by 0.03%, matching Barclays’ projections.
The increase in headline inflation was largely driven by energy prices.
Energy inflation jumped by 1.8 percentage points to 10.3% year-on-year, reflecting higher prices for fuel, natural gas and electricity.
Barclays Expects Inflation to Accelerate Further
Barclays expects inflationary pressure to increase again in August.
The bank forecasts headline inflation rising by another 0.5 percentage point to 3.4% year-on-year, primarily because of stronger energy inflation.
Core inflation is expected to remain unchanged at 2.5%.
Looking further ahead, Barclays projects headline inflation could peak at around 3.6% during the fourth quarter of 2026 before gradually moving back toward the ECB’s 2% inflation target during 2027.
French Business Confidence Improves
There were also encouraging signals from France despite the weaker PMI reading.
France’s INSEE business climate indicator increased to 98.1 in August, up from 97.3 in July. This marked the third consecutive monthly improvement, supported mainly by better confidence in manufacturing and retail trade.
Eurozone consumer sentiment also improved modestly.
The flash consumer confidence indicator rose by 0.4 points to -15.5, despite consumers facing higher fuel prices.
September ECB Rate Hike Remains Barclays’ Base Case
With economic activity remaining relatively resilient, inflation expected to rise further and energy prices continuing to create pressure, Barclays continues to forecast a 25-basis-point ECB rate increase in September.
After that move, however, the bank expects the European Central Bank to keep interest rates unchanged.
Barclays also warned that risks remain tilted toward tighter monetary policy if energy prices fail to stabilise quickly.
At the same time, wage pressures have shown signs of moderation. Negotiated wage growth slowed to 2.4% year-on-year during the second quarter, down 0.2 percentage point from the previous quarter.
The combination of resilient economic activity, elevated inflation and persistent energy pressures could therefore make the ECB’s September policy decision particularly important for the euro, EUR/USD and broader European financial markets.
