Euro Area Activity Quickens as Factories Rejoin the Expansion

Business surveys for August indicate that the euro area’s private economy is gathering pace, with growth broadening beyond services as factories edge back into the black. The advance estimate of the region’s composite PMI rose to its highest mark in fifteen months. Crucially, the manufacturing headline climbed above 50 for the first time since mid-2022, a threshold that separates contraction from growth. Production accelerated at its fastest rate in several years, underpinned by the first increase in new orders since May of last year. Services cooled a little but stayed on the expansion side of the ledger, leaving the overall pulse of activity firmer heading into late summer.
Behind the headline, several moving parts stand out. Industrial firms described healthier pipelines, citing stronger domestic demand and fewer bottlenecks in inputs and logistics. Export markets remained a headwind, yet the improvement in new orders and output suggests the factory slump is giving way to a tentative rebuild. Hiring trends diverged—service providers continued to add jobs while manufacturers, in aggregate, were more cautious—so total employment still inched higher. Sentiment improved in industry but slipped among service firms, a reminder that confidence is being rebuilt unevenly across sectors.
Prices are the nuance policymakers will watch. Costs facing businesses rose more briskly, reflecting energy and freight dynamics as well as trade-related increases in components and materials. Some of that pressure filtered into final prices, with companies reporting stronger selling-price growth in August. However, measures of services price inflation did not accelerate further, hinting that competitive forces and moderating demand are preventing a renewed surge. For central bankers, that combination of better growth and patchy disinflation argues for caution rather than a quick shift in stance.
National snapshots reinforced the regional story. Germany’s manufacturing-heavy economy showed the clearest improvement, with output and orders pointing higher and helping to lift the bloc’s industrial averages. France’s slowdown looked less severe than earlier in the year as services steadied and factories edged toward stabilization. Elsewhere, the same basic pattern—firmer factories, steadier services—was visible, though differences in labor and pricing trends remained significant.
Financial markets treated the data as a modest positive for the euro area’s cyclical outlook. Government bond yields nudged up as investors reassessed the path of policy, and the currency found some support on ideas that growth is becoming a touch less one-sided. Equity focus rotated toward manufacturers and investment-goods producers, which typically benefit early if a factory revival endures.
Whether this momentum lasts will hinge on the durability of new demand and the behavior of costs. Sustained order growth with tamer input inflation would allow output to climb without undermining progress on prices. Conversely, a relapse in external demand or a renewed squeeze from costs could cap the recovery. For the moment, the flash PMIs sketch a euro area that is slowly shaking off its industrial malaise while keeping its services engine running—an imperfect but improved footing for the months ahead.