The euro zone manufacturing sector unexpectedly returned to growth in September for only the second time in a year as firms boosted output in response to stronger demand, according to a survey of about 3,000 companies.
The Reuters Eurozone Purchasing Managers' Index jumped above the crucial 50 line that divides shrinkage from growth to 50.1 in September from 49.1 in August. It was above the consensus forecast of 49.7.
"The main impetus to order books appears to be the domestic market in the big three euro zone economies," said Mr Chris Williamson at NTC Research who forecast two months ago that the PMI would climb back above 50 in September.
"It seems to be more of a consumer driven upturn... in Europe, Asia and the United States."
The survey compiled by NTC Research showed the first expansion since February, a month before the war in Iraq persuaded business and consumers to shelve spending and investment plans. The previous expansion was in August 2002.
Higher production in Germany, France and Italy levered the output index to 51.7, the first expansion since March, from 50 in August. The new orders index leapt to 52.0 in September, the highest since August 2002 from 50.1 last month. Germany showed the biggest gains.
The survey shows that growing consumer and business confidence has started to have a real positive impact on economic growth.
It will reinforce perceptions that the European Central Bank will not cut interest rates again and that the next move is likely to be a rise from the current two per cent.
But the euro has put a brake on exports and growth this year and if it stays around $1.16, could hamper future growth. Also worrying is the lack of new jobs in the euro zone and continued attempts by companies to cut costs and boost profits with staff cuts. The employment index at 47.0 showed the 28th month of contraction.
Rising global demand was behind price rises, but many companies said euro strength had helped to keep import costs subdued.
The survey covers Germany, France, Italy, Spain, Ireland, Greece, Austria and the Netherlands, accounting for about 92 percent of manufacturing activity in the 12-nation bloc.