Eurozone Growth Gets a German Boost

Eurozone Growth Gets a German Boost

Mark Nichols

Wed, September 23, 2026 at 6:49 PM GMT+3 4 min read

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THE GIST

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The eurozone economy is proving harder to knock over than investors expected, with September business activity accelerating sharply as Germany and France both improved.

The catch is that stronger growth is arriving alongside renewed price pressure, which gives the European Central Bank another reason to keep interest rates higher after this month's 25-basis-point hike.

WHAT HAPPENED

The flash eurozone composite PMI climbed to 53.1 in September from 52.0 in August, comfortably beating expectations of around 51.7 and reaching its highest level since April 2023.

Anything above 50 signals expansion, and the latest reading marked a third consecutive month of growth across the bloc's private sector.

Services provided the biggest surprise, with the activity index rising to 53.0 from 51.6 and reaching a 10-month high, while manufacturing remained firmly in expansion territory. Factory output increased at its fastest pace in more than four-and-a-half years, while the manufacturing PMI held at 52.7.

Germany supplied much of the extra momentum. Its composite PMI jumped to 53.8 from 51.8, the strongest reading in almost a year and well ahead of expectations for little change.

The improvement was especially encouraging because German services returned to growth after five months of contraction, with the services PMI climbing to 52.9 from 49.7. Manufacturing remained strong even though its PMI eased slightly to 53.8 from 54.3.

France also returned to growth for the first time in 10 months, helping make the improvement broader than the German industrial rebound that had driven much of the region's recent momentum.

Demand strengthened too. New orders across the eurozone increased at their fastest pace since May 2022, while backlogs rose for the first time since June 2022 and companies added staff for another month.

The less comfortable part of the survey came from prices. Input costs and selling prices both increased at their fastest rates in four months as higher fuel, energy and supply-chain costs pushed through corporate budgets.

WHY IT MATTERS

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The PMI numbers matter because Europe has spent much of the year trying to answer whether the renewed energy shock would produce another period of weak growth, or whether the economy had become resilient enough to absorb higher costs. September leans toward the second outcome.

Manufacturing has been helped by demand for technology equipment, AI-related investment and higher defense spending, while Germany's improvement suggests the region's largest economy may finally be contributing more meaningfully after years of industrial weakness.

Services joining the recovery is particularly important because factories can be boosted temporarily by inventory building or large capital-spending programs, while broader service activity usually tells investors more about domestic demand.

The problem is that stronger growth makes the ECB's inflation decision more complicated rather than easier.

The central bank raised its deposit rate by 25 basis points to 2.5% earlier this month after higher energy prices pushed inflation further above its 2% target. It now expects headline inflation to average 3% this year and remain above target through 2028.

If economic activity were deteriorating rapidly, policymakers would have a stronger reason to tolerate some imported inflation and avoid tightening further. A composite PMI above 53 suggests the economy can absorb higher rates better than feared, while the renewed acceleration in business costs increases the risk that energy inflation spreads into broader prices.

That does not automatically mean another hike is imminent. PMI surveys capture business sentiment rather than hard economic output, and confidence remains subdued despite stronger activity. Higher oil and gas prices could also eventually squeeze household spending even if companies currently report healthy order books.

Still, the balance has shifted. The ECB is now looking at stronger growth, improving employment and faster price increases shortly after already restarting its tightening cycle.

WHAT'S NEXT

Investors will watch the next inflation releases for evidence that higher energy costs are feeding into core goods and services rather than remaining concentrated in fuel and utilities.

Germany will be equally important because its rebound is doing much of the work behind the stronger regional numbers. If services growth continues while manufacturing remains above 50, the eurozone's recovery starts looking considerably more durable.

The next ECB decision will therefore arrive with an awkward combination of better growth and worse inflation. Europe may have avoided the slowdown investors feared, but resilience also gives policymakers more room to keep leaning against prices.