By Indradip Ghosh
BENGALURU, Oct 5 (Reuters) - Euro zone business activity expanded at its fastest pace in nearly 3-1/2 years in September as demand remained strong despite inflation worries stemming from the Middle East war, according to a private survey which also showed resurgent price pressures.
Inflation in the bloc jumped more than expected to 3.8% last month from 3.2% in August on soaring energy costs, raising the risk the European Central Bank will lift interest rates to a higher-than-expected
level.
But that, alongside a recent surge in bond yields, has so far done little to harm activity. The S&P Global Eurozone Services PMI rose to a 10-month high of 53.0 in September from August's 51.6, in line with a preliminary estimate.
The composite index, which combines services and manufacturing, increased to 53.1 from 52.0 in August, its highest since April 2023 and capping the bloc's strongest quarterly performance since the second quarter of 2022.
A reading above 50.0 indicates growth.
"The collective signal from the PMI surveys is one of GDP growing at a 0.4% quarterly rate, with momentum accelerating as we head into the fourth quarter," said Chris Williamson, chief business economist at S&P Global Market Intelligence.
"Although the drivers of growth vary between countries, across the euro zone as a whole IT-related services are showing especially solid growth, buoyed by AI investments and supported by professional and commercial services growth."
Spain was the strongest performer, followed by Ireland, while Germany's recovery accelerated to one of its strongest rates since early 2022. Italy and France recorded modest growth.
DATA UNDERPIN ECB RATE HIKE BETS
Services firms reported faster growth in new business, a key gauge of demand, with export orders breaking the streak of 39 months of contraction.
Coupled with the strongest rise in factory orders since early 2022, overall new orders grew at their fastest pace in 41 months. Foreign demand was particularly strong, with overseas orders rising at the quickest rate in more than 4-1/2 years.
A slowdown in services hiring offset a modest pickup in factory job creation, leaving overall employment growth weaker. Business confidence, however, remained steady.
The survey also showed inflation pressures intensifying. Both input and output prices rose at their fastest pace in four months.
"A renewed upturn in price pressures signalled by the survey meanwhile hints at euro zone inflation running closer to 4% than the ECB’s 2% target," added Williamson.
"Combined with the acceleration of growth indicated by the PMI, the data will spur further speculation of more aggressive monetary policy tightening."
Markets are currently pricing in more than two ECB rate hikes by mid-next year.
(Reporting by Indradip Ghosh; Editing by Toby Chopra)
