Rebound in eurozone business activity overshadowed by fresh lockdowns

Eurozone business activity rebounded faster than expected after services companies benefited from a loosening of coronavirus restrictions in some countries and manufacturers gained from rising exports, according to a widely tracked survey of companies.

The IHS Markit flash eurozone composite purchasing manager index, an average of services and manufacturing, rose to 49.8 in December, outstripping consensus economists’ expectations and climbing from 45.3 in the previous month. 

“The data hint at the economy [being] close to stabilising after having plunged back into a severe decline in November amid renewed Covid-19 lockdown measures,” said Chris Williamson, chief business economist at IHS Markit. 

“The fourth-quarter downturn consequently looks far less steep than the hit from the pandemic seen earlier in the year, though the picture is very mixed by sector,” he said.

However, some countries have introduced hard lockdowns this week in response to surging coronavirus infections, hospitalisations and deaths — including Germany and the Netherlands — and they are expected to drag the eurozone into a double-dip recession this winter.

The flash estimate, based on data collected between December 4 and 15, was just below the 50 mark that indicates a majority of businesses are still reporting a contraction from the previous month. 

The reading has rebounded from the 13.6 low reached in the spring, reflecting more targeted restrictions that left most of the region’s schools, building sites and factories open. France this month allowed non-essential retailers to reopen after they had to close in November.

Many will be rubbing their eyes in amazement. But this should not lead us to conclude that the eurozone economy will avoid another recession in the winter half-year 2020/21

“Many will be rubbing their eyes in amazement”, said Christoph Weil, economist at Commerzbank. “But this should not lead us to conclude that the eurozone economy will avoid another recession in the winter half-year 2020/21.”

The better than expected survey findings helped European stock markets to rise on Wednesday, with the benchmark Stoxx 600 climbing 0.8 per cent, while Germany's Xetra Dax gained 1.5 per cent. The euro briefly broke above $1.22 against the US dollar for the first time in over two years.

A continued contraction in eurozone services activity was offset by resilience in manufacturing, which has been less disrupted by the second wave of coronavirus restrictions and benefited from rising exports, particularly to China.

The PMI for the eurozone services sector rose to a three-month high of 47.3 in December, up from 41.7 in the previous month. The PMI for eurozone manufacturing rose to a 31-month high of 55.5, up from 53.8 in November.

German and French manufacturers both reported growth in activity and orders in December, while services companies in the two countries reported an easing of the contraction in activity that has plagued them since the second wave of the virus started in September.

“While this is certainly positive news, the eurozone economy continues to face some strong challenges,” said Nicola Nobile, economist at Oxford Economics. “The recent decisions by some governments not to ease restrictions during the holiday period do not bode well in this respect.”

A more substantial contraction of business activity was reported in the rest of the eurozone, even if the rate of decline waned to the weakest since September, according to the report.  

Across the eurozone, inflows of new orders rose marginally and for the first time since September, boosted by an increased rate of growth of new orders in manufacturing. 

“Business expectations about output in the coming 12 months rose to the highest since April 2018,” IHS Markit said, adding that “employment fell in December at the slowest rate since the pandemic began”. 

The survey found that input costs for businesses rose in December at the fastest rate in more than two years, reflecting “widespread shortages for many key raw materials”, as suppliers’ delivery times lengthened sharply.

The flash PMIs, published about 10 days before the final figures, are the first most comprehensive indicator of economic activity in the final month of the year.