Business activity in the eurozone picked up this month despite surging inflation driven by supply chain disruptions, rising energy costs and higher wages, which together with a rebound in Covid-19 cases damped sentiment.
The eurozone IHS Markit flash composite purchasing managers’ survey, a monthly poll that takes the pulse of business activity, showed costs and average selling prices for goods and services rising at the fastest pace since the survey began in 1998.
Businesses reported that shortages were driving up prices for many goods and services, alongside higher shipping costs, rising energy prices and increases in staff costs. Selling price inflation also accelerated in both manufacturing and services to the fastest recorded by the survey as companies sought to pass higher costs on to customers, most notably in Germany.
However, the headline 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 forecast by economists polled by Reuters, reflecting higher than expected readings for Germany and France.
Official data published by Eurostat earlier this month showed that headline eurozone inflation rose to 4.1 per cent 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 board member Isabel Schnabel told Bloomberg that while it was “plausible” to assume inflation was going to drop below the ECB target of 2 per cent in the medium term, the risks to inflation were “skewed to the upside”.
Jessica Hinds, economist at Capital Economics, said that the unexpected rise in the eurozone composite PMI in November “suggests that the region’s recovery has not lost further momentum”, but added that “with supply shortages still acute, Covid restrictions being tightened and price pressures intensifying, renewed falls 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 supply delays, soaring costs and renewed Covid worries, business optimism had sunk to the lowest since January, “adding to near-term downside risks for the eurozone economy”.
The survey showed services outperformed manufacturing for a third straight month, recording the strongest growth in activity for three months.
Growth also picked up in manufacturing, driven by robust demand for tech equipment, household goods, and food and drink. In contrast, growth was held back by a third successive monthly drop in production in the autos sector, which was severely affected by supply chain disruptions.
Across the eurozone manufacturers, suppliers’ delivery times increased at one of the steepest rates on record, easing only modestly from October, due to supply shortages and transport problems.
Businesses continued to hire workers at a fast pace but they nonetheless accumulated backlogs of work, particularly in German factories.
Growth accelerated in Germany and France, with the latter recording the sharpest rise in services activity for nearly four years, which offset a second successive monthly drop in factory output. Markit also reported that the rest of the region enjoyed faster growth of both manufacturing and services than seen in France and Germany.
The ECB’s Schnabel said stricter Covid restrictions were “likely to have a moderating effect on activity in the short run,” in particular in the contact-intensive services sector. “But I do not think that this will derail the overall recovery.”
Source: Economy - ft.com
