Eurozone business activity grows at fastest pace in 15 years, but confidence ebbs

Morgan Condon

04-Aug-2021

LONDON (ICIS)–Economic activity in the eurozone moved at its fastest pace in over 15 years in July, but optimism for the coming 12 months has depleted.

Both manufacturing and service sectors contributed to the increase, according to the purchasing managers’ index (PMI) released by IHS Markit on Wednesday, which noted a significant rise in manufacturing output and faster expansion in services.

Flash PMI indices
(below 50 = contraction)
July 2021 final July 2021 flash June 2021 final Trend
Eurozone composite 60.2 60.6 59.5 15-year high
Germany 62.4 62.5 60.1 Record high
Spain 61.2 n/a 62.4 2-month low
Italy 58.6 n/a 58.3 42-month high
France 56.6 56.8 57.4 3-month low

This marked the fifth successive month of expansion in the private sector, which is the longest uninterrupted span of growth since the coronavirus pandemic took effect in Europe early last year.

Activity in July trumped June’s 15-year record after accounting for seasonal factors.

Confidence in the coming year slipped to a four-month low, falling from the previous month, which marked the highest point since 2012.

The services sector output growth was the fastest pace since mid-2006. Despite the rate of growth in the manufacturing the sector being the slowest in five months, it was still stronger than the services sector.

This was the quickest rise in demand for goods and services in the single-currency bloc since May 2000, with new orders reflecting the faster pace of growth in the service sector compared to manufacturing.

There was higher demand in both domestic and international markets. Although foreign demand was weaker than June, a rise in new export business meant growth was still the second-fastest on record since this data collection began in September 2014.

Despite buoyant demand, disruptions in the supply chain hampered further growth, weighed down on activity across the eurozone in July, with the highest rise in outstanding business and extended backlog accumulation by five months.

Companies increased employment at the fastest rate in almost 21 years in a bid to meet increased demand.

While inflationary trends stabilised in July, input costs rose at the strongest rate since September 2000, with a marginal increase on June. Output charge inflation was unchanged from June’s record high.

However, expectations have eased to the lowest point since March, possibly indicating a slowdown in growth in the third quarter, as fears over COVID-19 variants and vaccination rates remain.

“Alongside the sustained elevated growth recorded in the manufacturing sector, the impressive strength of the service sector’s expansion in July means the eurozone should see GDP growth accelerate in the third quarter,” said IHS Markit chief economist Chris Williamson.

“Worries about the Delta variant have become more widespread, however, subduing activity in some instances and raising concerns about the possibility of virus restrictions being tightened again.”

Analysts at Oxford Economics are also wary of the outlook over the second half of 2021, although supply-side pressure could ease off for the manufacturing sector.

“We expect the shortages of input factors and continued supply-chain disruptions affecting the manufacturing sector to start gradually easing soon,” said Oxford Economics.

“For the services sector it will be pivotal to maintain the high vaccination speed to limit the spread of the already prevalent Delta variant, especially since we expect consumption to shift towards services.

“While we think that these factors won’t derail the rebound, they could delay some of the recovery.”

Thumbnail picture: A man works in the Persico Marine factory in Nembro, near Bergamo, Italy, Source: Antonio Calanni/AP/Shutterstock

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