The latest Purchasing Managers’ Index (PMI) data for the Euro area reveals a mixed economic picture for September 2023, presenting both challenges and opportunities for the region’s growth outlook. We do see real resilience in the services sector. The all-important manufacturing sector has begun to cool, a worrisome sign to economists and investors alike.
Separately, IHS Markit reported the Euro area’s manufacturing PMI dipped from 50.6 in August to 49.8 in September. This drop is a strong sign that the manufacturing industry, which had been surging since the start of 2025, is beginning to see a dip. Analysts identify the reversal of front-loading effects in trade with the U.S. as a major cause of this drop. This change is starting to weigh on net production nationally within the Euro subcontinent.
The services PMI had much better forward-looking behavior, increasing to 51.3 from 50.5. This notable uptick is a strong positive indicator that the services sector is healthy, robust and playing a pivotal role in driving sustainable economic growth. The gap between manufacturing and services underscores a fractured economic reality. Of course, each sector is reacting differently based on the diagnosis and a variety of local conditions.
Inflation has a complex image. In September, consumer price inflation climbed to 2.2% year-on-year, as compared with 2.0% in August. Energy prices are largely responsible for this increase. They faced high base effects that helped pull the overall inflation rate down. While headline inflation has spiked, core inflation remained unchanged at 2.3% YoY. This back-to-back stability is an encouraging signal that underlying price pressures are beginning to stabilize.
On a monthly basis, core inflation rose just 0.2% sa in September. Having core inflation very stable looks good and shows stronger underlying economic stability. While energy prices are undoubtedly volatile, the broad-based inflationary pressures are not accelerating at a worrisome pace.
Looking forward, economists are predicting weak year-on-year GDP growth of just 0.1% quarter-on-quarter for both Q3 and Q4 of 2023. The September PMI figures indicate a more robust expansion in Q3, exceeding previous forecasts. This would be a ray of light for the manufacturing sector given its current headwinds and challenges.
Long-term forecasts have been adjusted downward. The Euro area’s central inflation projection for 2027 has fallen to 1.8% y-o-y. This is down from their previous estimate of 1.9%. In a like manner, the headline inflation forecast for 2027 has been lowered to 1.9% y/y from 2.0%. These changes reflect the fact that forecasters are now projecting inflation to average close to 2.1% in Q4. Afterwards, they expect it to drop below their targets in the out years.
The overall inflation expectation is still quite dovish. Inflation expectations are 1.8% y/y on average for 2026. This anticipated decline in inflation underscores the challenges facing policymakers as they navigate through external and internal pressures impacting the Euro area’s economy.