The ECB’s staff contacts with 64 leading euro area companies, conducted between September 28 and October 7, describe an economy absorbing a cost shock unevenly. Activity grew moderately in the third quarter with unchanged momentum expected in the fourth, but manufacturing was split between very strong demand for high value added electronics and electrical equipment and flat or falling volumes elsewhere under intensifying import competition. Construction and real estate were losing momentum, retail remained subdued, and most other services grew well.
The price evidence is the rates relevant part. Contacts reported stronger selling price increases in the third quarter than anticipated, led by energy, transport and capital goods, where memory chip prices surging on AI demand added to costs. Yet pass-through of the conflict related cost increases was becoming harder as hedges expired and contracts renewed. About 90 percent of consumer facing firms said pass-through to their selling prices was only partial or limited, against less than half of business facing firms, citing weak demand and competitive pressure. Selling price growth is expected to moderate in the coming months, even as cost pressure persists into 2027.
Wage expectations moved only slightly against the ECB. Contacts’ quantitative indications imply wage growth slowing from 3.2 percent in 2025 to 3.0 percent in 2026 and 2.9 percent in 2027, a milder deceleration than in previous rounds. About 40 percent of contacts thought the conflict driven inflation uptick would result, or risked resulting, in higher wage demands, up from 20 percent in the previous round, but most still expected no notable impact given subdued demand and employment.
Employment dynamics remained subdued, with headcounts falling in manufacturing and, to a lesser extent, services, partly offset by hiring in IT, aerospace, defence and energy. Investment was increasingly driven by AI, electrification, defence and data centres, and contacts noted that concerns about rising government bond yields and upcoming elections in some countries weighed on the outlook. Taken with the forecasters survey published the same morning, the contacts give the Governing Council a consistent story: costs up, pricing power limited where it meets the consumer, and wages decelerating slowly rather than spiralling.