Euro zone business activity shrinks in January as lockdowns hit services

Economic activity in the euro zone shrank markedly in January as stringent lockdowns to contain the coronavirus pandemic hit the bloc’s dominant service industry hard.

With hospitality and entertainment venues forced to remain closed across much of the continent, surveys on Friday highlighted sharp contractions in the services industry but also showed manufacturing remained strong as factories largely kept working.

IHS Markit’s flash composite purchasing managers’ index (PMI) for the euro zone, seen as a good guide to economic health, fell further below the 50 mark separating growth from contraction to 47.5 in January from December’s 49.1. A Reuters poll had predicted a fall to 47.6.

“High infection rates are again forcing governments to extend and tighten containment measures,” said Tomas Dvorak at Oxford Economics.

“The flash PMIs point to a looming contraction in euro zone GDP in Q1. We don’t expect any meaningful economic recovery before the pandemic is brought under control.”

Still, a Reuters poll earlier this week showed the bloc’s economy was expected to grow 0.6% this quarter and would return to its pre-COVID-19 level within two years on hopes the rollout of vaccines will allow a return to some form of normality. [ECILT/EU]

Activity in Germany’s services sector shrank for a fourth month in a row as a hard lockdown shuttered most non-essential businesses in Europe’s biggest economy. Despite slowing to a four-month low, manufacturing remained in expansion territory as exports kept German factories humming.

With hotels and restaurants closed, France’s service sector bore the brunt of national coronavirus restrictions and overall activity there shrank more than expected.

In Britain, outside the European Union, a third national lockdown sparked the sharpest drop in business activity since May. A post Brexit shift to a more bureaucratic trading arrangement with the EU also contributed to the decline.

Global shares slipped off record highs as the gloomy data reminded investors of the struggles facing the economic recovery, taking the shine off a rally fuelled by hopes of U.S. stimulus by newly inaugurated President Joe Biden. [MKTS/GLOB]

HEADCOUNT, PRICES FALL

A PMI covering the euro zone’s dominant service industry dropped to 45.0 from 46.4, exceeding expectations in a Reuters poll that had predicted a steeper fall to 44.5 and still a long way from historic lows at the start of the pandemic.

With activity still in decline and restrictions likely to be in place for some time yet, services firms were forced to chop their charges, with the output price index falling to its lowest reading since June.

That will be disappointing for policymakers at the European Central Bank - who on Thursday left policy unchanged - as uncomfortably low inflation has been a thorn in the ECB’s side for years.

Factory activity remained strong and the manufacturing PMI held well above the breakeven level.

But despite strong demand factories again cut headcount, as they have every month since May 2019.

As immunisation programmes are being ramped up after a slow start in Europe survey respondents remained optimistic about the coming year.

“The outlook hinges on the pace of the so-far slow vaccine rollout; more delays will only postpone the recovery,” said Jessica Hinds at Capital Economics.

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