Europe’s economy has entered the final stretch of 2026 with a stronger pulse than economists expected, even as the war-driven energy shock that has lifted fuel, gas and transport costs continues to squeeze households and companies. Preliminary September surveys show euro-area business activity expanding at its fastest pace in more than three years, with services accelerating, manufacturing holding in growth territory and new orders rising sharply. The surprise is important because it comes less than two weeks after the European Central Bank raised interest rates for the second time this year to contain inflation that has moved back above target. For policymakers, investors and companies, the message is uncomfortable but clear: the euro area is proving more resilient than feared, yet that resilience may also give the ECB more room to tighten policy again if energy costs keep feeding into prices.

A surprise acceleration across the euro area

The strongest signal came from the S&P Global Flash Euro Zone Composite Purchasing Managers’ Index, a closely watched measure that combines activity in manufacturing and services. The index rose to 53.1 in September from 52.0 in August, according to data published on September 23. Readings above 50 indicate expansion. The result was not merely better than the consensus estimate in a Reuters poll; it was stronger than the highest forecast submitted by economists surveyed before the release. That makes the September reading more than a routine monthly beat. It suggests that companies across the currency union have so far absorbed a difficult combination of high energy prices, tighter financing conditions and geopolitical uncertainty without the broad retreat in production and services activity that many forecasters had expected.

The improvement was also broad enough to matter. Services activity rose to its strongest level in nearly a year, while the manufacturing PMI remained in expansion territory. New orders increased at the fastest pace in more than four years, helped by another increase in export demand, including trade between euro-area members. Companies responded by adding staff, a sign that managers were not treating the stronger order books as a purely temporary spike. S&P Global’s survey therefore points to a private sector that is not simply surviving a fresh energy shock but, at least in September, continuing to generate new demand and capacity pressures. That combination challenges the idea that Europe must inevitably choose between growth and inflation control in the immediate term. Instead, it raises the possibility of both stronger activity and persistent price pressure.

Germany returns to growth on two engines

Germany provided one of the clearest examples of the shift. The S&P Global Flash Composite PMI for Europe’s largest economy jumped to 53.8 in September from 51.8 in August, its highest reading since October 2025 and well above expectations for no change. The improvement was particularly notable because services returned to growth after five months of contraction. The German services PMI rose to 52.9 from 49.7, while manufacturing remained firmly above the 50 threshold even after easing slightly from the previous month. For an economy that has spent much of the past several years wrestling with weak industrial demand, expensive energy and soft domestic confidence, the return of both manufacturing and services to expansion is a meaningful development.

The German data also complicate the prevailing narrative that the country’s recovery is being driven almost entirely by public spending and exports. Government infrastructure and defence outlays remain important, and exporters still benefit from pockets of external demand, but the September survey suggests private-sector activity has become broader. Employment rose for a second month, while backlogs increased, indicating that firms were facing enough demand to use more labour and existing capacity. That does not erase structural problems in German industry, from high electricity costs and competition from China to ageing infrastructure and labour shortages. It does, however, show that the economy can still generate cyclical momentum even before those structural issues are fully addressed.

There is a warning embedded in the same German figures. Input costs rose at their fastest pace in four months and were well above the long-run survey average, with companies repeatedly citing higher fuel and energy bills. That matters because Germany remains one of the euro area’s most energy-sensitive industrial economies. A sustained rise in costs can first compress margins, then lead firms to lift selling prices, delay investment or reduce hiring. September’s survey shows companies doing the opposite on employment, which is encouraging, but the longer the energy shock lasts, the greater the probability that today’s resilience becomes tomorrow’s cost pass-through.

France rebounds, but the recovery looks less secure

France also surprised on the upside, though the composition of its rebound was more fragile. The Flash France Composite Output Index rose to 51.2 from 48.5 in August, taking private-sector activity back above the line between contraction and expansion and marking the fastest growth in just over two years. Services drove most of the improvement, with the services activity index rising to 51.4 from 48.0. New orders increased for the first time in ten months and foreign business contracted at its slowest pace of 2026. After months of weak demand and political uncertainty, the September figures therefore offered evidence that the French economy still has the capacity to respond quickly when household and business demand stabilise.

Yet the French survey is a reminder that a positive headline does not guarantee a durable expansion. New orders only edged higher, companies cut jobs for a fifth consecutive month and business expectations deteriorated. Firms also reported faster increases in input costs and selling prices, reflecting higher fuel, energy, metals and component costs. That combination — better current activity but weaker confidence and continued job cuts — suggests companies remain cautious about whether the improvement will last. In other words, France is participating in the euro-area rebound, but it has not yet produced the same labour-market signal as Germany. The contrast will matter if stronger monetary tightening begins to bite unevenly across national economies.

The energy shock has changed, not disappeared

The central economic question is why activity has remained relatively strong when Europe is again facing a major energy shock. The answer is partly that the shock is different from the one that followed Russia’s full-scale invasion of Ukraine in 2022. Europe has reduced its dependence on Russian pipeline gas, expanded liquefied natural gas import capacity, improved industrial energy efficiency and cut gas consumption in several sectors. Those changes have made the economy less vulnerable to a single supplier. They have not made it immune to global energy disruptions. The present pressure is coming from a broader mix of oil, gas, shipping and refined-product constraints linked to conflict in the Middle East and the continuing war in Ukraine.

Energy markets underline that distinction. European gas prices have risen sharply this year, but they remain far below the extraordinary peaks reached during the 2022 crisis. Europe has also been able to lean more heavily on LNG from the United States and other suppliers. At the same time, the cushion is thinner than the headline stability can suggest. Gas storage entered the autumn at unusually low levels, while Middle East supply disruptions have reduced flexibility in global LNG markets. Refined fuels such as diesel have become an additional source of stress because Europe relies heavily on imports and has faced reduced availability from both Middle Eastern and Russian supply chains. The result is a more complex energy shock: less catastrophic than 2022 in one market, but spread across more parts of the fuel system.

For businesses, the transmission is immediate. Higher fuel prices raise transport and logistics costs. Gas feeds into industrial production, heating and electricity prices. Refined-product shortages can increase the cost of freight, construction, agriculture and aviation. Electricity prices can then diverge sharply across countries depending on generation mixes and exposure to gas. This helps explain why companies in the September PMI surveys were able to report stronger output at the same time as faster cost inflation. Demand has held up, but the cost base is moving higher. The durability of the expansion will depend on whether those costs plateau or continue rising into winter.

Inflation is already above the ECB’s target

The inflation backdrop leaves the European Central Bank little room for complacency. Eurostat reported that euro-area annual inflation rose to 3.2% in August from 2.9% in July, well above the ECB’s 2% target. Energy was a major contributor, while services also continued to add significant pressure. Earlier in September the ECB raised its deposit rate by 25 basis points to 2.50%, the second increase of 2026, in response to the renewed inflation surge. The move marked a decisive shift from the easing cycle that followed the earlier post-pandemic inflation episode and showed that policymakers are prepared to react even when the main shock originates outside the domestic economy.

The policy dilemma is familiar but unusually sharp. Central banks cannot produce oil, gas or diesel, and higher interest rates do not repair pipelines or reopen shipping routes. What higher rates can do is reduce the probability that a temporary energy shock becomes embedded in wages, rents, services prices and inflation expectations. The ECB is therefore watching for so-called second-round effects: evidence that companies are routinely passing higher costs to customers and that workers are demanding compensation in ways that create a persistent price-wage cycle. The September PMI data are mixed on that question. Companies are passing some higher costs into output prices, but economists cited by Reuters said they still saw no clear evidence of broad second-round effects in wages.

That distinction is critical. If the energy shock remains concentrated in fuel and related goods, the ECB can afford to look through part of the initial increase and avoid overtightening. If stronger growth allows firms to protect margins by raising prices and if labour markets remain firm enough to support higher wage demands, the case for another rate increase becomes stronger. September’s combination of robust new orders, higher employment and accelerating input costs therefore gives policymakers more evidence on both sides of the argument — stronger growth reduces the immediate recession risk, but it also reduces the cost of tightening further.

Stronger data raise the odds of another rate increase

Financial markets have already been moving toward the view that the ECB is not finished. Reuters reported that investors are pricing three additional ECB rate increases by the end of June 2027. That is a substantial change from the assumptions that dominated European markets earlier in the year, when the central debate was how far and how quickly monetary easing might proceed. The war-driven energy shock has reversed that logic. Instead of waiting for inflation to fall sustainably to target, markets are now asking how high rates may have to go to prevent a new inflation cycle from taking hold.

The September PMI surprise strengthens that argument because one of the main objections to tighter policy — the risk of choking off weak growth — has become less immediate. S&P Global’s survey was consistent with quarterly euro-area GDP growth of about 0.4%, according to its chief business economist. That is not a boom, but it would be a respectable pace for a region that has spent years near stagnation. More importantly, it would suggest that higher borrowing costs and energy prices have not yet produced the sharp demand destruction that would normally force the ECB to hesitate.

Still, policymakers are unlikely to treat one survey as decisive. ECB Vice President Boris Vujcic said last week that markets may be placing too much emphasis on energy prices alone and that the Governing Council will assess a wider set of indicators. That caution remains relevant. PMIs are timely and useful but they are surveys, not complete national accounts. Official data for July were weaker, and the coming months will test whether September’s improvement was the beginning of a sustained acceleration or a temporary response to changing inventories, orders and seasonal patterns. The ECB’s next decisions will therefore depend not only on the level of the PMI but on whether inflation, wages, credit and consumption confirm its message.

The ECB’s own forecasts still describe a slow-growth economy

The central bank’s September staff projections provide an important counterweight to the upbeat business surveys. The ECB expects real euro-area GDP to grow 0.9% in 2026, 1.4% in 2027 and 1.5% in 2028. It forecasts headline inflation of 3.0% this year, 2.5% next year and 2.1% in 2028. Those numbers depict an economy that is expanding, but only gradually, while inflation returns to target slowly. The forecast also assumes that the Middle East energy shock does not deteriorate into a much more severe disruption.

The ECB’s alternative scenarios show how large that uncertainty remains. In its severe scenario, real GDP growth falls to 0.4% in 2027 and inflation rises to 5.4%. The scenario assumes substantially more persistent commodity-price shocks, greater uncertainty and stronger indirect and second-round effects. It is not a forecast and the ECB does not assign it a probability. Its purpose is to illustrate the scale of the trade-off if energy supply deteriorates. That exercise is particularly relevant now because the September PMI data could tempt investors to extrapolate recent resilience too aggressively. The economy has performed better than feared, but the distribution of possible outcomes remains unusually wide.

The baseline itself also highlights Europe’s underlying constraints. ECB staff expect exports to remain subdued because of US tariffs, the earlier appreciation of the euro and persistent competitiveness problems. Global demand is improving, but much of the strongest trade growth is linked to the artificial-intelligence investment cycle, where Europe has a smaller share of production than the United States and several Asian economies. That means the euro area can benefit from stronger global growth without capturing the same share of high-value technology exports. The September domestic rebound is therefore welcome, but it does not remove the need for deeper investment in productivity, energy infrastructure and industrial competitiveness.

Consumers remain the weak link

One reason to remain cautious is that businesses and households are sending different signals. Euro-area consumer confidence weakened in September as higher energy prices began to hit household expectations. This matters because a recovery led mainly by companies, inventories and public spending can lose momentum if consumers respond to higher fuel and utility bills by cutting discretionary purchases. Household spending has been one of the expected supports for the euro-area outlook because employment remains relatively high and real wages had begun to recover from earlier inflation shocks. A renewed rise in energy costs threatens that channel by reducing real disposable income.

The timing is particularly sensitive. Governments have fewer fiscal options than they had during the first energy crisis because debt levels are higher, borrowing costs have risen and budget rules are tighter. Broad subsidies for electricity, fuel or gas would be expensive and could blunt the demand-reducing effect of monetary policy. More targeted support may protect vulnerable households without stimulating the whole economy, but designing such measures quickly is politically difficult. The result is that households may absorb more of the current shock directly than they did in 2022 and 2023. If that happens, consumer confidence and retail spending could weaken even while business surveys remain positive.

A widening gap between Europe’s economies

The latest data also reinforce the idea that the European cycle is becoming more uneven. Germany and France both improved in September, but their labour-market signals diverged. Southern European economies have generally been more resilient in recent years, helped by tourism, services and European investment funds, while parts of northern and central Europe have been more exposed to manufacturing weakness and high energy costs. The same energy shock can therefore have very different effects depending on a country’s industrial structure, electricity mix, fiscal capacity and exposure to imported fuels.

That divergence complicates monetary policy because the ECB sets one interest rate for 21 economies. A rate level that is appropriate for a fast-growing services economy can feel restrictive in an industrial region facing weak external demand. Conversely, keeping policy too loose because some members are struggling can allow inflation to persist in stronger parts of the bloc. September’s broad-based PMI improvement makes the trade-off easier for the ECB for now, but a cold winter or renewed supply disruption could quickly reopen national differences. Investors will therefore watch not only the euro-area aggregate but the distribution of growth and price pressure across member states.

Industry is stronger than the recent European narrative suggests

The resilience of manufacturing deserves particular attention. Europe’s industrial sector has faced a long list of headwinds: competition from Chinese producers, high energy prices, weak construction, sluggish global trade, higher financing costs and structural challenges in autos and chemicals. Against that background, a euro-area manufacturing PMI holding at 52.7 in September is significant. It indicates that the sector is not merely stabilising after a downturn but expanding. Germany’s manufacturing index also remained above 50 despite a modest monthly decline.

Part of that strength may reflect defence, infrastructure and energy investment, which are supporting order books across engineering, construction materials and industrial supply chains. Part may also reflect inventory rebuilding after an extended period of caution. Export demand has improved, even though structural competitiveness issues remain. The critical question is whether companies interpret the current expansion as sufficient reason to increase capital spending. If they do, Europe could move from a recovery driven by government programmes and services toward one supported by private investment. If they do not, the PMI rebound may lift output without changing the continent’s long-term productivity trajectory.

The cost of capital will be decisive. Higher ECB rates raise financing costs for machinery, property, renewable-energy projects and small-business expansion. Larger companies with access to bond markets can often absorb those changes better than smaller firms dependent on bank credit. That creates another potential divide within the recovery. Strong aggregate surveys may coexist with pressure on smaller manufacturers and service providers. The quality of the expansion will therefore depend not just on headline output but on whether investment and hiring remain broadly distributed across firm sizes and sectors.

Britain offers a warning from outside the euro

The United Kingdom’s September survey provides a useful contrast. British services activity remained above 50 but slowed to a three-month low, while price pressures increased. S&P Global said the survey was consistent with quarterly economic growth of around 0.1%, substantially weaker than the pace suggested for the euro area. Britain is outside the currency union and has its own monetary and fiscal framework, but it is exposed to many of the same energy and trade shocks. The difference shows that resilience is not automatic. Similar external pressures can produce different outcomes depending on domestic demand, fiscal policy, investment and sector composition.

The British example also illustrates the political challenge facing European governments. When energy prices rise at the same time as borrowing costs, finance ministers face pressure to support households and businesses without worsening deficits or forcing central banks to tighten even more. The euro area has the added complexity of coordinating national fiscal policies under common rules. Stronger-than-expected activity is helpful because it supports tax revenue and reduces immediate recession fears, but it can also reduce the political urgency for structural reform. The danger is that governments treat cyclical resilience as proof that deeper competitiveness problems have been solved.

What investors will watch next

For markets, the September data shift attention toward the next inflation releases, energy prices and the ECB’s October meeting. A continued fall in oil prices would ease some of the immediate pressure. Brent crude moved back toward the $100-a-barrel area on September 23 as improving Gulf supply and hopes of diplomatic progress reduced some fears, although refined-product markets remained extremely tight. Diesel margins in Europe reached record levels, highlighting the risk that lower crude prices do not translate quickly into lower transport and industrial fuel costs. That distinction will matter for inflation statistics and company margins.

Bond markets will also remain sensitive. If investors become more confident that the ECB will raise rates again, short-dated yields are likely to reflect a higher expected policy path. Longer-term yields may also remain elevated because governments are issuing more debt to finance defence, infrastructure and the energy transition. The combination of stronger growth, higher inflation and larger borrowing needs is very different from the low-growth, low-rate environment that defined much of Europe before the pandemic. For banks, the shift can support interest income, but for governments, property markets and leveraged companies it raises refinancing pressure.

Equity markets face a more complicated calculation. Stronger activity is positive for earnings, particularly for industrial, consumer and financial companies. Yet higher discount rates can reduce the value investors place on future profits, while energy-intensive sectors remain exposed to cost shocks. The winners are therefore likely to be firms with pricing power, strong balance sheets and relatively low energy intensity. Companies that depend on cheap credit or cannot pass on higher costs may struggle even in a growing economy. September’s PMIs improve the macroeconomic backdrop, but they do not remove the need for selectivity.

The next test comes in the fourth quarter

The most important question is whether September marks a durable turning point or a temporary high-water mark before winter. The positive case is straightforward. New orders are rising, exports are improving, services have strengthened and employers are still adding workers. If energy prices stabilise, those trends could reinforce one another. Companies with fuller order books would continue hiring and investing, while stable employment would support household income and consumption. In that scenario, the euro area could enter 2027 with better momentum than the ECB’s relatively cautious annual forecasts imply.

The negative case is equally clear. Energy prices could rise again if the Middle East conflict disrupts more oil, gas or refined-product supply. A cold winter could force Europe to compete more aggressively for LNG at a time when storage levels are already low. Higher costs could then feed more forcefully into consumer prices, prompting another round of ECB tightening. Household confidence could weaken, companies could postpone investment and the recovery could stall. The very resilience that now reassures markets could, paradoxically, encourage tighter policy that tests the expansion later.

That is why the September data should be read as evidence of resilience rather than proof of immunity. Europe has changed since the first post-Ukraine energy shock. It has diversified energy supply, adapted industrial processes, increased LNG capacity and learned to operate with more volatile commodity markets. Those changes have reduced some vulnerabilities. At the same time, the continent is now carrying higher public debt, facing more expensive financing, investing heavily in defence and infrastructure, and competing with the United States and China in sectors where scale and technology increasingly determine productivity. The economy may be sturdier, but the strategic challenge is larger.

A stronger economy gives Europe options — and responsibilities

For European policymakers, the September surprise creates an opportunity. A stronger economy can make structural reform easier because governments are not trying to overhaul labour markets, permitting systems, energy infrastructure and capital markets in the middle of a deep recession. It can also support the investment needed to strengthen grids, expand renewable generation, build storage capacity and reduce dependence on imported fossil fuels. Those investments would not only serve climate objectives; they would also reduce the frequency with which geopolitical shocks translate into inflation and monetary tightening.

The same logic applies to Europe’s capital markets and industrial strategy. Stronger demand should be used to encourage productive private investment rather than to delay difficult decisions. The ECB has repeatedly argued that Europe’s fragmented financial system makes it harder for promising companies to scale. The energy shock has added another layer to that problem by raising the cost of operating energy-intensive businesses. If governments can use the current period of resilience to accelerate cross-border investment, permitting reform and energy integration, the next shock may be less economically damaging.

For the ECB, however, the immediate task is narrower: keep inflation expectations anchored without unnecessarily breaking the recovery. September’s PMI data make that balancing act both easier and harder. Easier, because stronger growth means another modest rate increase would be less likely to trigger an immediate downturn. Harder, because the same resilience could allow companies to pass higher costs through to customers, extending inflation. The Governing Council will therefore need to distinguish between an economy that can absorb higher rates and one whose apparent strength is only masking the delayed effects of tighter policy.

Small businesses will reveal whether the recovery is broad enough

One of the most important tests will come from smaller companies, which often feel changes in credit conditions and energy bills earlier than large listed groups. Big manufacturers can hedge fuel costs, issue bonds or shift production between countries; smaller firms usually have fewer options. If bank lending standards remain tight while electricity, diesel and wage bills rise, the headline expansion in the PMI could conceal a more fragile picture underneath. That would matter for employment because small and medium-sized enterprises account for a large share of jobs across the European Union and are especially important in services, construction and regional manufacturing supply chains.

The September improvement in new orders offers some protection because stronger revenues can offset higher costs, but margins will be crucial. If firms can raise prices without losing customers, inflation may remain persistent. If they cannot, profitability and investment may weaken instead. Either outcome has consequences for the ECB: the first argues for vigilance on inflation, while the second raises the risk that higher rates amplify a slowdown with a lag. Bank lending surveys, insolvency data and business investment intentions will therefore be useful checks on the upbeat PMI signal during the fourth quarter.

Europe’s resilience is real, but the margin for error is small

For now, the evidence points to a euro-area economy performing better than the geopolitical and energy backdrop would suggest. Business activity is expanding at the fastest pace in more than three years. Germany has regained growth across both manufacturing and services. France has returned to expansion. New orders are increasing, employment is holding up and manufacturing remains above the 50 threshold. Those are not trivial achievements after years in which Europe was repeatedly described as the weakest major part of the global economy.

But resilience should not be confused with safety. Inflation is above target, energy costs are rising, consumer confidence has softened and the ECB has already resumed rate increases. The region still faces weak trend productivity, expensive energy, uneven national performance and intense competition from the United States and China. The September surveys show that Europe can absorb shocks better than expected. The next several months will determine whether that capacity becomes the foundation for a sustained recovery or simply buys time before higher prices and higher interest rates impose a heavier cost.

The central economic story of Europe this autumn is therefore not that the energy crisis has disappeared. It is that the continent has become harder to knock off course. That is a meaningful improvement, but it comes with a policy price. Stronger growth reduces the argument for rapid monetary relief, while persistent energy inflation increases the case for further tightening. Europe enters the fourth quarter with more momentum than forecasters expected and less room for complacency than the headline numbers imply. The balance between those two realities — resilience and renewed inflation risk — will shape the euro-area outlook well beyond September.