Eurozone and UK business activity slows sharply as lockdowns take toll

Business activity has dropped sharply in the eurozone and the UK in the latest sign that tighter restrictions to contain rising coronavirus infections are dragging economies towards a double-dip recession.

A key eurozone survey of companies showed a majority of businesses reporting contracting activity for the third consecutive month while the equivalent UK index dropped to its lowest level since May.

The data underscored the darkening outlook for European economies, which are likely to shrink again because of renewed lockdowns following recessions in the first half of 2020 when the pandemic took hold.

It also triggered a sell-off in equity markets with the Stoxx Europe 600 index falling 1.1 per cent and the FTSE 100 dropping 0.7 per cent in morning trading.

The IHS Markit flash composite purchasing managers’ index for the eurozone, a widely-watched indicator, dropped 1.6 points to 47.5 in January, staying below the 50 threshold that separates expansion and contraction.

“A double-dip recession for the eurozone economy is looking increasingly inevitable as tighter Covid-19 restrictions took a further toll on businesses in January,” said Chris Williamson, chief business economist at IHS Markit.

The prospects for the eurozone economy have worsened since several countries including Germany and the Netherlands tightened lockdowns in recent weeks in response to a resurgence of the virus.

In the UK, the flash IHS Markit/Cips composite purchasing managers’ index fell to 40.6 in January, the lowest reading in eight months and well below the 45.5 level forecast by economists polled by Reuters. It was also the third consecutive reading below 50.

Samuel Tombs, chief UK economist at consultancy Pantheon Macroeconomics, said the January PMI figures “provide more evidence that the current lockdown has damaged the economy more than November’s light-touch variety”.

He warned that since the PMI excludes activity in the retail and public sectors, the closure of schools and the cancellation of non-Covid-19 work by hospitals “will additionally depress GDP”.

Economists also said the disruption to UK trade after the end of the post-Brexit transition period on December 31 and wider problems at ports weighed on activity.

Line chart of Flash eurozone composite purchasing managers' output index (below 50 = majority of respondents reported contraction in activity) showing Lockdowns cause fresh eurozone business downturn

The data highlighted the pandemic’s two-speed economic impact as the services sector in both the UK and the eurozone was hit much harder by the fresh virus curbs than manufacturing.

The UK purchasing managers’ index for services fell to 38.8 in January compared with 49.4 in December. The downturn dragged the composite index lower because services — which include pubs and restaurants shut because of Covid-19 — account for about 80 per cent of the UK economy.

In the eurozone the services sector PMI fell 1.4 points to 45 in January, but the manufacturing PMI dropped less than expected to 54.7, down from 55.2 in the previous month but still in expansionary territory.

Sentiment about future prospects “cooled slightly in the service sector” but optimism among manufacturers increased to a three-year high, IHS Markit said.

Phil Smith, associate director at IHS, said manufacturers in Germany — the region’s largest economy — “are seemingly undeterred by the growing troubles on the supply side”.

However, there were negative signs elsewhere in the eurozone manufacturing sector. “The rate of factory output growth weakened to the slowest since the recovery began,” IHS Markit said, while the recent sharp increase in container shipping costs between Asia and Europe caused the biggest jump in manufacturing input costs for almost three years.

The flash PMIs, published about 10 days before the final figures and based on about 85 per cent of typical responses, are the earliest comprehensive indicator of the economic impact of the new restrictions.

Jessica Hinds, economist at Capital Economics, said the data meant the eurozone economy would “start 2021 firmly on the back foot”, adding that the outlook for the rest of the year “hinges on the pace of the so-far slow vaccine rollout; more delays will only postpone the recovery”.

However, Christoph Weil, an economist at Commerzbank, said the survey results “confirm our view that the recession in the euro area will be much milder in the winter half-year 2020-21 than in the spring 2020”.

The European Central Bank published its quarterly survey of forecasters on Friday, finding many of them had cut their forecasts for eurozone growth this year by an average of 0.9 percentage points to 4.4 per cent — but their average forecasts for next year rose 1.1 points to 3.7 per cent.

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