Services and Germany and France join forces! Eurozone September PMI unexpectedly surges to a more than three-year high, markets bet on another ECB rate hike in October

Eurozone business activity unexpectedly accelerated in September, with the flash composite PMI rising to its highest level in more than three years, as services improved more than expected and both Germany and France, the bloc's two largest economies, also beat forecasts. With new orders growing at the fastest pace in more than four years and input costs jumping again on high energy prices, market bets on further European Central Bank rate hikes have clearly intensified. Data published by S&P Global on Wednesday showed that the eurozone's flash composite PMI for September rose to 53.1 from 52.0 in August, well above the 50 mark separating growth from contraction and above analysts' expectations of 51.7. By component, services were the biggest surprise. The eurozone services PMI rebounded to 53.0 in September from 51.6 in August, a near one-year high, while the market had expected a decline to 51.5. The manufacturing PMI was unchanged at 52.7 in August, but the gauge measuring output edged up to 53.4 from 53.3 and continued to support the composite PMI. Overall new orders surged at the fastest pace in more than four years, with exports rising further, including intra-eurozone trade. The pickup in demand drove companies to step up hiring, though firms also faced a sharp rise in input costs. As the Middle East conflict and the war between the United States and Iran pushed up energy prices, companies' operating costs jumped markedly, and they were able to pass some of the costs on to customers. Chris Williamson, chief business economist at S&P Global Market Intelligence, said the renewed rise in inflationary pressures in September was not surprising, as the ongoing Middle East conflict drove energy prices higher; but against that backdrop, the resilience of economic growth was all the more encouraging. At the country level, both of the eurozone's two largest economies beat expectations. German business activity grew at its fastest pace since October 2025, while France unexpectedly expanded, at its fastest rate in more than two years. Williamson noted that manufacturing, led by Germany, is enjoying its best growth spell in more than four years, with rising artificial intelligence and defense spending serving as important drivers; at the same time, services growth is also picking up, indicating that the growth story is showing broad-based improvement. Williamson also said that order books in both manufacturing and services gained further momentum in September, suggesting the economy is likely to maintain sustained momentum into the fourth quarter. He cautioned, however, that the strong economy is pushing up consumer prices. Although the eurozone economy has shown greater-than-expected resilience to the Middle East conflict and the jump in energy costs, how long that resilience can last remains uncertain. Eurozone inflation is currently at its highest level in nearly three years, and borrowing costs are also rising. Earlier this month, the ECB delivered its second rate hike this year and its second since the Iran war broke out, in a bid to curb energy-driven inflation, and warned that price pressures could prove persistent. Officials, reassured by the economy's solid performance, have raised this year's growth forecast to 0.9%. The OECD also published a more positive outlook for the eurozone, raising its 2026 growth forecast by 0.2 percentage points to 1% on Wednesday, while also upgrading its forecasts for Germany, Italy and Spain. By contrast, it sharply downgraded its forecast for France, now expecting the eurozone's second-largest economy to grow by just 0.4%. Market pricing currently shows the ECB will raise rates three more times by the end of June next year. Williamson believes that, amid geopolitical headwinds and rising prices, the resilience of economic growth could encourage the ECB to hike again before the end of the year and add to the case for acting sooner, making an October hike "very likely." The ECB could move as early as October. The PMI is closely watched by markets because it is released at the start of each month and can reveal economic trends and turning points early. As a measure of the breadth rather than the depth of output changes, business surveys can sometimes be difficult to map directly onto quarterly GDP performance, but the latest reading has reinforced market attention on the eurozone economy's resilience and inflationary pressures.