Tue. Dec 7th, 2021

Eurozone business activity picked up this month despite rising inflation driven by supply chain disruption, rising energy costs and higher wages, which, along with a recovery in Covid-19 cases, dampened sentiment.

The eurozone IHS Markit flash composite purchasing managers’ survey, a monthly survey that takes the pulse of business activity, showed that costs and average selling prices for goods and services have risen at the fastest pace since the survey began in 1998.

Businesses have reported that shortages are pushing up prices for many goods and services, coupled with higher shipping costs, rising energy prices and rising staff costs. Sales price inflation also accelerated to the fastest recorded by the survey in both manufacturing and services, as companies tried to pass on higher costs to customers, particularly in Germany.

Line chart of purchasing managers' sub-indices, below 50 = a majority of businesses reporting an expansion showing that Eurozone's input and output prices are rising at a record pace

However, the heading eurozone IHS Markit flash composite purchasing managers index, a measure of the health of the economy, unexpectedly increased to a two-month high of 55.8 in November from 54.2 in the previous month.

The figure, based on data collected between November 12 and 19, was stronger than the drop to 53.2 predicted by Reuters-polled economists, reflecting higher-than-expected readings for Germany and France.

Official data published by Eurostat earlier this month showed that headline inflation in the eurozone rose to 4.1 percent in October, the fastest pace since the creation of the currency union, and Tuesday’s data point to a further increase in November.

European Central Bank adviser Isabel Schnabel told Bloomberg that while it was “acceptable” to assume that inflation would fall below the ECB target of 2 per cent in the medium term, the risks to inflation were “skewed upside down”. .

Line Manager of Purchasing Managers' Index, Under 50 = Majority of Businesses Reporting a Shrinkage Showing Eurozone Business Activity Rising to 2-Month Highs

Jessica Hinds, an economist at Capital Economics, said the unexpected rise in the eurozone’s composite PMI in November “indicates that the region’s recovery has not lost further momentum”, but added that “with supply shortages still acute, Covid restrictions tighten and price pressure increasing, renewed declines in the index seem likely ”.

Chris Williamson, at IHS Markit, said the stronger expansion of business activity in November “was unlikely to prevent the eurozone from suffering slower growth in the fourth quarter.” He added that due to the combination of delays in supply, rising costs and renewed Covid concerns, business optimism had fallen to its lowest level since January, “contributing to short-term downside risks for the eurozone economy”.

The survey showed that services outperformed manufacturing for a third consecutive month, recording the strongest growth in activity for three months.

Growth also picked up in manufacturing, driven by strong demand for technological equipment, household goods and food and beverages. In contrast, growth was held back by a third consecutive monthly decline in production in the automotive sector, which was severely affected by the supply chain disruption.

Across the eurozone, suppliers’ delivery times have increased at one of the sharpest rates on record, declining only modestly from October due to supply shortages and transport problems.

Businesses continued to hire workers at a rapid pace, but they nevertheless accumulated backlogs of work, especially in German factories.

Growth accelerated in Germany and France, with the latter recording the sharpest increase in service activity for almost four years, counteracting a second consecutive monthly decline in factory production. Markit also reported that the rest of the region enjoyed faster growth in both manufacturing and services than was seen in France and Germany.

The ECB’s Schnabel said stricter Covid restrictions “are likely to have a moderating effect on short-term activity,” especially in the contact-intensive services sector. “But I do not think it will jeopardize the overall recovery.”

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