Euro zone business activity accelerated to its fastest pace in seven months in March, driven by a moderation in the long-running downturn in manufacturing, according to a survey. However, growth in the services sector slowed slightly.

The positive trend in the common currency bloc’s economy comes amid rising optimism, fueled by plans for a significant increase in infrastructure and defense spending, particularly in Germany. These plans are expected to further boost the region's economic outlook in the coming months.

The preliminary composite euro zone Purchasing Managers' Index (PMI), compiled by S&P Global and released by HCOB, rose to 50.4 in March from 50.2 in February, marking its highest level since August. This is the third consecutive month the index has stayed above the 50-mark threshold, which separates growth from contraction. However, growth remains modest, and the PMI was slightly below the expected rise to 50.8 in a Reuters poll.

The services sector saw a slight decline in growth, with its PMI falling to 50.4 from 50.6 in February, missing the forecast of 51.0. In contrast, the manufacturing sector showed signs of improvement, with its PMI rising to 48.7 from 47.6 in February, the highest level in over two years. A key indicator of factory output showed expansion for the first time in two years, reaching 50.7 from 48.9, its highest since May 2022.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, commented, “Just in time for the beginning of spring, we may see the first green shoots in manufacturing.” He noted that while caution is advised based on a single data point, it’s significant that manufacturers expanded their output for the first time since March 2023.

Inflation pressures persisted, particularly in manufacturing, where firms raised prices in response to higher costs. Both input and output inflation hit their highest levels in seven months. However, services inflation grew at a slower pace.

In a sign of improving business sentiment, employment growth accelerated. The composite employment index increased to 50.1 from 49.2, marking the first time in eight months it has surpassed the breakeven point.

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