Weekly focus: European industry grows for the first time in three years

This week's main data highlights were the PMI reports for August. In the euro area, the report showed the manufacturing sector recording growth for the first time since June 2022. The manufacturing PMI crossed the 50-mark in a larger-than-expected rise to 50.5 from 49.8, defying expectations of a decline to 49.5. The rise was due to both France and Germany. At the same time, services PMI declined to 50.7 from 51.0, which was as expected. The positive string of growth surprises thus continues in the euro area, which supports our call that the ECB is done cutting interest rates. We also received data on wage growth for the second quarter of 2025. The indicator of negotiated wages rose to 4.0% y/y in Q2 from 2.5% y/y in Q1, which was heavily affected by base effects, but nevertheless a bit high. Overall, wage growth is trending lower compared to last year.

In the US the PMIs also for August exceeded expectations, with manufacturing rising to 53.3 (consensus: 49.7) from 49.8, while services declined slightly to 55.4 (consensus: 54.2) from 55.7. The manufacturing increase was driven by higher new orders, employment, and output indices, with the output index reaching its highest level in over three years - indicating very strong details overall. However, given the volatility in PMIs since April, caution is warranted in interpreting single-month movements. That said, the August PMI report stands out as more positive compared to the recent downward trends in ISM and weak payroll data.

The UK PMI data came in stronger than expected like in the US and euro area, with the composite index rising to 53.0 from 51.5, driven by a much stronger-than-anticipated performance in the service sector. The August PMIs add to a series of hawkish data, adding to the case for the Bank of England (BoE) to hold rates unchanged in November, though there is plenty of significant incoming data before the November meeting and we continue to expect a cut. July inflation was also to the hawkish side, which surprised to the topside across the board, but the details suggests that it was driven by the volatile air fares component alleviating some concern for the BoE. Headline CPI came in at 3.8% (cons: 3.7%), core at 3.8% (cons: 3.7%) and services at 5.0% (cons: 4.8).

In China, a batch of data for July showed weakness in the economy across the board, which adds to the loss of momentum seen in recent months. Both consumption and housing moved another notch lower, and investments weakened as well. The only bright spot currently is strong exports, but it is paramount for the economy that domestic demand gets on a stronger footing. It is also a high priority for China's leaders, and we expect to see new stimulus soon targeting consumption and housing. S

Next week will be light in terms of economic data. The main highlight is the flash August inflation data from Germany, France, Italy, and Spain, which is released ahead of the euro area aggregate. We expect euro area HICP inflation to increase to 2.1% y/y in August from 2.0% y/y in July driven by an increase in energy inflation while core inflation is expected to remain unchanged at 2.3% y/y. In Japan, we receive a batch of data on Friday covering retail sales, unemployment, and Tokyo CPI inflation. US PCE inflation is also due Friday.

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