Eurozone PMI Beats Forecasts, Pointing to Stronger Growth -- Update

By Paul Hannon Features Dow Jones Newswires

The eurozone economy found fresh momentum in September and may have accelerated in the third quarter as a whole, according to surveys of purchasing managers released Friday.

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The pickup is the latest positive surprise from an economy that has already outperformed most expectations this year. As it entered 2017, most economists expected to see a slowdown from a disappointing 2016. Instead, they have been forced to raise their projections, and the European Central Bank now thinks the economy will grow more rapidly than it has in a decade.

Data firm IHS Markit on Friday said its composite Purchasing Managers Index for the eurozone -- based on survey responses from 5,000 manufacturers and service providers -- rose to 56.7 in September from 55.7 in August, reaching its highest level since May.

That was a surprise, with economists surveyed by The Wall Street Journal last week forecasting a drop to 55.6. A reading above 50 signals an increase in activity, while a reading below signals a decline.

The PMIs for July and August had suggested the eurozone economy was slowing very slightly, in line with economists' expectations. But the September jump has raised the average reading for the third quarter. Chris Williamson, IHS Markit's chief economist, said that points to quarter-to-quarter growth of 0.7%, up from 0.6% in the three months to June.

"The eurozone economy ended the summer with a burst of activity, with the PMI signaling renewed impetus to already-impressive rates of growth of output, order books and employment during September," he said.

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However, other economists are more cautious, pointing to economic data for July that pointed to a slowdown. Most see quarter-to-quarter growth remaining at, or coming in just below, the second quarter figure.

"We think that is an overly optimistic steer, particularly given relatively soft industrial production numbers coming from Germany," said Chris Hare, an economist at HSBC. "But, while there is a possibility that the PMIs are overly bullish on growth, they do show businesses continuing to brim with optimism."

The September revival was driven by Germany and France, the eurozone's largest members. France's PMI hit its highest level in 76 months, while its German equivalent was the highest in 77.

Coming into 2017, most economists expected a series of key elections across the eurozone to weigh on household and business sentiment, slowing spending. But as the last of those votes approaches in Germany on Sunday, it is clear political uncertainty hasn't had the impact they feared.

Indeed, some now suggest that the failure of political parties hostile to the euro to make larger gains may have been because of the economic pickup, with unemployment rates continuing to fall. According to the surveys of purchasing managers, businesses hired additional workers at the second fastest pace in a decade, falling just short of March's high.

Across the eurozone, manufacturers led the September charge, with activity growing at the fastest rate in more than six-and-a-half years as exports continued to rise, although there are signs new orders from overseas are starting to slow.

"Today's release confirms our view that, despite some concerns amongst investors, the recent appreciation of the euro is not sufficient to derail the region's economic momentum," said Julien Lafargue, an equities strategist at J.P. Morgan Private Bank.

The eurozone's accelerating growth has reduced the need for ECB stimulus, and the central bank has signaled that it will next month announce plans for phasing out its bond-buying program. The strength of the PMI, which is closely watched by ECB policy makers, may help sway any who doubt that is the right course of action.

However, there are few signs the pickup in growth has transformed the outlook for inflation, which is well below the ECB's target of just under 2%.

Write to Paul Hannon at paul.hannon@wsj.com

(END) Dow Jones Newswires

September 22, 2017 07:04 ET (11:04 GMT)