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Euroland Q3 Growth Accelerates

The upturn in the eurozone economy continued to test capacity, leading to the sharpest increase in backlogs of work since February 2011
Business across the eurozone grew rapidly in September as firms struggled to keep up with demand,  with October looking likely to be lively as well.Business across the eurozone grew rapidly in September as firms struggled to keep up with demand,  with October looking likely to be lively as well.

The eurozone economy ended the third quarter with a flourish as output growth accelerated to a four-month high in September, underpinned by the steepest gain in new work received for almost six-and-a-half years.

At 56.7 in September, up from 55.7 in August, the final IHS Markit Eurozone PMI Composite Output Index matched the earlier flash estimate. The outlook also remained bright, with business optimism rising to a four-month high, Markiteconomics.com reported.

The headline index has signaled expansion throughout the past 51 months. However, its average over the third quarter as a whole (56.0) was slightly weaker than in the prior quarter (56.6). September saw rates of output expansion accelerate in both the manufacturing and service sectors, although the former continued to register the superior performance overall.

Manufacturing rose at the quickest pace since April 2011. The rate of expansion in services business activity improved to a four-month high and was one of the best seen over the past six years.

Germany Leads the Group

Germany rose back to the top of the PMI Output Index rankings in September. Output expanded at its best pace since April 2011, supported by surging manufacturing sector growth aided by a steep gain in new export business.

Growth in Germany's services sector accelerated to a six-month high in September, boosting overall private sector growth and giving Europe's largest economy momentum going into the fourth quarter.

Markit's final composite PMI, which tracks the manufacturing and services sectors that account for more than two-thirds of the economy, rose to 57.7—its highest reading in almost 6-1/2 years—from 55.8 in August.

Late last month, economic institutes hiked their growth forecasts to 1.9% this year and 2% next year, while also saying Germany would have record budget surpluses over the next two years.

Ireland was in second position–despite seeing growth slip to a two-month low—while the revival in France gathered pace.

Economic activity in France rose at the sharpest rate in over six years (since May 2011), with growth of output and new orders relatively evenly distributed across the manufacturing and service sectors.

Spain saw its rate of economic expansion improve from August’s seven-month low while Italian growth was the weakest since March, but still solid overall.

The upturn in the eurozone economy continued to test capacity, leading to the sharpest increase in backlogs of work since February 2011. Companies raised employment to one of the greatest extents over the past decade, with job creation registered across Germany, France, Italy, Spain and Ireland.

Price pressures increased during September, with rates of inflation in input prices and output charges both hitting five-month highs.

Struggling to Honor Demand

Business across the eurozone grew rapidly in September as firms struggled to keep up with demand, with October looking likely to be lively as well, Reuters reported.

“The economy enters the fourth quarter with business energized by inflows of new orders growing at the fastest rate for over six years and expectations of future growth reviving after a summer lull,” said Chris Williamson, chief business economist at IHS Markit.

Williamson said the PMI pointed to third-quarter economic growth of 0.7%, faster than the 0.5% predicted in a Reuters poll last month.

Eurozone inflation undershot expectations in September, Eurostat data showed last week, highlighting how price growth remains weak and supporting the European Central Bank’s case for only gradual removal of its extraordinary stimulus.

A Reuters poll of economists in September suggested the ECB will announce on Oct. 26 a six-month extension to its asset purchase program but will cut how much it buys each month to €40 billion ($47 billion) from January.

Brexit Worries

The drop in new orders across the UK’s service sector last month is a serious concern, says Duncan Brock of the Chartered Institute of Procurement & Supply.

He fears that “a stagnation trend” is developing in the sector, with firms unwilling to take risks until they know how Britain’s exit from the EU is playing out.

Brock says: Where consumers recovered a little from their spending hesitation last month, it was the turn of businesses to be spooked into inactivity, exerting greater scrutiny over new projects and long-term spending plans. The pressure of Brexit and resulting uncertainty were at the heart of this indecision.

 

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