Strong expansion in eurozone business activity boosts hiring

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Eurozone economy updates

Eurozone business activity expanded at nearly its fastest pace for 15 years in August according to a widely watched survey that indicated the bloc is on course for strong third-quarter growth, according to economists.

The IHS Markit flash composite purchasing managers’ index reached 59.5, down slightly from its 15-year high of 60.2 in July. A reading above the 50 mark indicates a majority of businesses reported an expansion in activity compared with the previous month.

Rising vaccination rates boosted business optimism about the future, which was near its highest level since the survey began in 2012. The survey also recorded strong hiring activity and rapid increases in input costs as manufacturing continues to grapple with supply chain disruption.

Chris Williamson, chief business economist at IHS Markit, said the eurozone economy had logged “impressive momentum”.

Line chart of Purchasing managers' index (above 50 = a majority of businesses reported an expansion in activity) showing Eurozone business activity holds close to 15-year high

Bert Colijn, senior economist at ING bank, said it was “firing on all cylinders” and forecast quarterly growth of about 2 per cent in the three months to September — the same strong pace as the second quarter.

“Concerns about the impact of the Delta [coronavirus] variant and input shortages remain but have not derailed the rebound thus far,” he said. Services activity remained “exceptionally strong” and “employment is booming as the reopening of the economy means demand for workers”, he added.

Employment growth remained at a 21-year high for the second month in a row as businesses increased staffing to meet expanding order books. Manufacturing businesses logged some labour shortages but hiring accelerated in the services sector.

Line chart of Purchasing managers' employment sub-index (above 50 = a majority of businesses reported an expansion) showing Strong growth in hiring across the eurozone

Shortages of material and components weighed on factory production. There was a big increase in suppliers’ delivery times — a key barometer of supply delays — although the pace moderated slightly for a third successive month.

Businesses’ costs and prices grew at some of the fastest rates for 20 years, driven by input shortages and booming demand.

“Supply chain delays continue to wreak havoc, leaving companies frequently unable to meet demand and pushing firms’ costs higher,” said Williamson. However, he noted “some welcome signs that these inflationary pressures may have peaked for now”.

Jack Allen-Reynolds, senior Europe economist at Capital Economics, predicted consumer price inflation would “jump in August and remain above [the European Central Bank’s] target in the second half of the year”.

The eurozone’s two largest economies, Germany and France, both logged a slowdown in the pace at which manufacturing activity increased.

In contrast, business activity growth accelerated slightly in the rest of the eurozone, hitting its fastest pace in 21 years. Allen-Reynolds suggested this could be “because the southern economies have benefited more from the return of tourists, even if the summer holiday season is nothing like those seen before the pandemic”.

The flash PMIs are published one week before the final results and are based on about 85 per cent of the typical responses.

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