Euro zone business activity hits 16-month high but highlights country divergence, PMI shows

By Jonathan Cable

LONDON (Reuters) -Euro zone business activity grew at its fastest pace in 16 months in September but remained modest as new orders stagnated after briefly expanding in August, potentially raising concerns about the sustainability of the bloc's economic growth, a survey showed.

The survey highlighted a stark difference between the bloc's two biggest economies of Germany and France with the former - Europe's largest - accelerating, while political woes kept the latter on the backfoot.

The HCOB Flash Eurozone Composite Purchasing Managers' Index, compiled by S&P Global, edged up to 51.2 in September from 51.0 in August, marking the ninth consecutive month of growth. A Reuters poll had predicted a 51.1 reading.

PMI numbers above 50.0 indicate growth in activity, while those below that level point to a contraction.

"The composite PMI for manufacturing and the service sector in the euro area rose slightly again in September. It thus continued its slight upward trend," said Ralph Solveen at Commerzbank.

"The improvement in recent months is solely attributable to a rise in the German index, while there are no signs of improvement in the other countries."

Germany's PMI bounced to a 16-month high of 52.4, ahead of poll expectations for a modest lift to 50.6 from 50.5 but in France activity contracted for a thirteenth month and at the fastest pace since April with its PMI falling to 48.4.

"From a country perspective, France stands out negatively. The PMI dropped to the lowest level since April, with declines in both manufacturing and services," said Bert Colijn at ING.

"That stands in contrast to Germany, where services activity picked up according to the PMI. With heightened political uncertainty, the French economy appears to be mirroring this sense of instability."

Hundreds of thousands took part in anti-austerity protests across France last week, calling for the previous government's fiscal plans to be scrapped, for more spending on public services, higher taxes on the wealthy and for the reversal of an unpopular change making people work longer to get a pension.

In Britain, outside the European Union, firms reported a loss of momentum and confidence ahead of possible new tax increases in finance minister Rachel Reeves' budget due in November, according to its PMI that also showed another drop in hiring.

PRICE PRESSURES EASING

Services in the euro zone drove the overall expansion, with the sector's PMI rising to 51.4 from 50.5 in August - the highest reading in nine months and comfortably ahead of the Reuters poll estimate for no change. However, manufacturing lost momentum with its headline index dropping into contraction territory at 49.5 from 50.7 in August.

Overall employment levels stagnated in September, ending a six-month run of job creation, as firms responded to the lack of new business growth. Manufacturers continued to cut jobs, while hiring in services slowed to a seven-month low.

Suggesting little chance of an imminent upturn, an index measuring composite new business - demand - dipped to the breakeven point of 50.0 from 50.3.

Inflationary pressures eased during the month, with both input costs and output prices increasing at slower rates.

Manufacturing input costs decreased for the first time in three months, while services firms reported a high, albeit softer, pace of inflation and raised their prices at the weakest rate since May.

"The services output price PMI - which policymakers might watch particularly closely as a guide to domestic price pressures - declined to 52.7, leaving it only a touch above its 2019 average of 52.4," said Jack Allen-Reynolds at Capital Economics.

The ECB left interest rates unchanged earlier this month and another Reuters poll said the bank was done with cutting.  

(Reporting by Jonathan Cable; Editing by Hugh Lawson and Ros Russell)