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Eurozone Manufacturing Rebounds As Domestic Demand Spurs Growth


Manufacturing activity in the eurozone recorded its first expansion since mid-2022 in August, bolstered by a surge in domestic demand and output. The report, based on the HCOB Eurozone Manufacturing Purchasing Managers’ Index (PMI), signals an encouraging turnaround for future production as optimistic projections emerge from key market indicators.

Record PMI Levels Indicate Renewed Growth

The HCOB Manufacturing PMI reached a three‐year high of 50.7 in August, climbing from 49.8 in July and surpassing the critical growth threshold of 50. This significant improvement outstripped preliminary estimates and highlighted a robust rebound in factory output—the strongest since March 2022. Additionally, new orders, a vital measure of demand, expanded at their fastest rate in nearly three and a half years, reinforcing the sector’s overall positive momentum.

Domestic Demand Offsets Global Uncertainties

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, emphasized that domestic orders have been instrumental in mitigating the impact of weakening external demand. “The economic recovery in the manufacturing sector is broadening… Incoming orders also offer hope for a sustainable recovery,” de la Rubia noted. As US tariffs continue to exert pressure, boosting domestic consumption appears to be a critical strategy in sustaining production levels, with many industry players expecting increased output over the next 12 months.

Country-Specific Insights And Economic Implications

Among eurozone nations, Greece and Spain stood out with PMIs of 54.5 and 54.3, respectively, marking vigorous factory growth. France and Italy experienced moderate expansions, while Germany, Europe’s largest economy, posted a modest increase to 49.8—a 38-month high that nearly reached the growth threshold. This development offers a welcomed respite for Germany, which saw its economy contract by 0.3 percent last quarter amid declining U.S. demand.

Outlook Amid Policy Considerations

Despite the favorable indicators within the manufacturing sector, overall economic sentiment in the eurozone remains mixed. A recent European Commission survey highlighted deteriorating economic outlooks for the region, contrasting with the optimistic forecasts from manufacturers regarding future production. Meanwhile, incremental price decreases in manufacturing, despite marginal increases in input costs, provide additional context for the evolving market dynamics.

Anticipating Further Policy Implications

With the European Central Bank maintaining its key rate at 2 percent, policymakers appear poised to hold steady in the near term. Further adjustments, particularly discussions on rate cuts, are expected to resume in the autumn should the economic landscape continue to be challenged by factors such as persistent U.S. tariffs.


AI Spending Is Complicating The Fed’s Fight Against Inflation

Silicon Valley leaders have long argued that artificial intelligence will make technology and services dramatically cheaper. OpenAI CEO Sam Altman has described a future where intelligence becomes extremely inexpensive, while Tesla and SpaceX CEO Elon Musk has predicted that AI and robotics will create greater abundance and drive down costs.

So far, those benefits have yet to materialise at scale. AI adoption remains relatively slow, while the enormous investment needed for data centres and AI infrastructure is putting pressure on electricity prices, supply chains and other costs. For the Federal Reserve, this creates a difficult balancing act: AI could eventually boost productivity and reduce inflation, but its current buildout is contributing to higher prices.

OpenAI chief economist Ronnie Chatterji said AI needs to be adopted by organisations and generate measurable value before its broader economic impact becomes visible in productivity statistics.

AI Adoption Remains Uneven

Capital spending on AI infrastructure in the U.S. is expected to reach $581 billion this year, according to Goldman Sachs Research, with global investment potentially reaching $1 trillion.

Despite the scale of spending, adoption remains far from universal. A May survey by the U.S. Census Bureau found that 17% to 20% of U.S. businesses reported using AI, with adoption significantly higher among large companies.

Companies that have implemented AI at scale also highlight the challenges. Julie Averill, former CIO of Lululemon, said successful deployment requires changes in employee behaviour and trust in the technology. OpenAI has observed a similar divide: its most advanced business users deploy AI at around eight times the rate of average companies.

Why Productivity Gains May Take Time

Economists point to the limits of automation. AI can perform individual tasks effectively, but many jobs combine tasks that are difficult to automate.

Stanford professor Charles Jones refers to these as “weak links”. Radiology, for example, involves interpreting scans but also communicating with patients and working with colleagues. AI can automate part of the job without eliminating the profession itself.

As a result, the full economic impact of AI may not become clear until businesses adopt the technology more broadly and reorganise their operations around it.

AI Adds To The Fed’s Policy Challenge

AI’s economic impact has become part of the Federal Reserve’s policy debate. Fed Chairman Kevin Warsh has argued that AI could eventually become a significant disinflationary force by increasing productivity and strengthening U.S. competitiveness.

Other officials are more cautious. In July, the Fed kept interest rates at 3.5% to 3.75%, while some officials expressed concern that AI infrastructure spending could add to inflationary pressures.

Minneapolis Fed President Neel Kashkari pointed to massive data-centre investment as a new source of demand. Household electricity prices rose 10% in the two years through July, compared with a 6.2% increase in overall consumer prices. Meanwhile, shortages of chips and other AI components are pushing up costs. JPMorgan Chase estimates that DRAM prices could rise 400% by the end of 2026 compared with 2024.

Warsh has consequently adopted a more cautious tone, saying that while AI investment is laying the groundwork for future growth, the timing and scale of its economic effects remain difficult to predict.

For the Fed, the challenge is clear: AI could eventually deliver major productivity gains, but the cost of building that future is already showing up in the economy.

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