Euro Area: Downturn in business activity exacerbates at start of 2021

Euro Area PMI January 2020

Euro Area: Downturn in business activity exacerbates at start of 2021

The flash Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, dropped to 47.5 in January from 49.1 in December, logging the third consecutive monthly decline in business activity amid higher new coronavirus cases and tighter restrictions. Therefore, the PMI scratched away from market expectations of 47.6 and moved further below the 50-threshold that distinguishes contracting from expanding activity in the private sector.

Both the manufacturing and the services sector weakened in the month, although the former remained in expansionary terrain. Production in the manufacturing sector expanded for the seventh consecutive month, albeit at a somewhat softer pace than in December, while the contraction in output in the services sector sharpened. Similarly, new orders grew less robustly in the manufacturing sector, while they fell more steeply in the services sector. Meanwhile, firms cut jobs for the 11th consecutive month, albeit only marginally. On the price front, input cost inflation intensified, especially in the manufacturing sector, due to widespread shortages for many key raw materials. However, output prices kept falling, as manufacturing prices rose only modestly while selling prices for services fell at the steepest pace since June. Lastly, business expectations pulled back from December although they remained strong overall.

Assessing the Eurozone’s two largest economies, Germany continued to expand in January, albeit at the softest pace since the recovery began in July, while the pace of contraction in business activity in France intensified.

Commenting on the release, Chris Williamson, chief business economist at IHS Markit, said:

“A double-dip recession for the eurozone economy is looking increasingly inevitable as tighter COVID19 restrictions took a further toll on businesses in January. […] Some encouragement comes from the downturn being less severe than in the spring of last year [and from] signs that companies and households are finding ways to adapt behaviour to the pandemic and its associated restrictions. […] “The survey data therefore add to the view that the eurozone will see a soft start to 2021, but that the economy should pick up momentum again as the vaccine roll out gathers pace.”

Meanwhile, Bert Colijn, Eurozone senior economist at ING, stated:

“With lockdowns now extended into February and more aggressive variants of the virus increasing the risk of further extensions being necessary, expect this pattern to continue. Manufacturing growth moderating and a sharp contraction in services will lead to a first quarter contraction in GDP. A bleak start to a year which should, at some point, see a quick turnaround in economic output as vaccinations take hold.”

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