Business activity has slowed sharply in the two largest euro area economies according to a widely followed business survey, in an early indication that tighter restrictions to contain the rise in coronavirus infections could cause a double recession hollow in the block.
French and German service companies reported a decline in activity in January, according to the IHS Markit survey, although manufacturing remained in expansion territory – highlighting the two-speed economic impact of Wave 2 of the pandemic.
After Chancellor Angela Merkel’s government instituted a tighter lockdown, German service companies announced their fourth consecutive monthly contraction in January. The IHS Markit flash index of German service purchasing managers fell to 46.8, from 47 at the end of last year.
The reading was above the 45.3 level predicted on average by economists polled by Reuters, but it remained below the 50 mark, indicating that a majority of companies reported a contraction in l activity compared to the previous month.
The flash services index for France fell to 46.5 in January, its fifth consecutive monthly decline and down from 49.1 the previous month. Economists polled by Reuters had expected a drop to 48.5.
“The French private sector has started the new year as it has ended the last, with restrictions from Covid-19 leading to a further decline in business activity,” said Eliot Kerr, economist at IHS Markit. “However, there [was] a big positive to take from the latest PMI data, and that was the return of job growth. “
While production and new orders overall continued to decline, French companies increased their workforce for the first time in nearly a year, with employment growth in the service sector offsetting the decline in manufacturing jobs.
The French manufacturing index remained in growth territory at 51.5, up slightly from 51.1 in December and above economists’ expectations. France’s composite PMI score – which combines services and industry – was 47, up from 49.5 the previous month.
The continued contraction in German services was partly offset by resistance from the manufacturing sector, which benefited from the rise in exports, particularly to China. The German manufacturing index fell to 57 in January, from 58.3 the previous month, but still well in the expansion territory. The composite PMI for Germany fell to a seven-month low of 50.8 from 52.
However, the container shipping costs between Europe and Asia have quadrupled over the past eight weeks and IHS Markit said German manufacturers reported a “sharp rise in prices” reflecting “increasing tension in supply chains, with companies surveyed highlighting a combination of growing demand for inputs , shortages and bottlenecks resulting from limited freight capacity and a lack of available shipping containers ”.
Phil Smith, associate director at IHS, said German manufacturers “don’t seem daunted by growing problems on the supply side,” adding that many “are overflowing with confidence in the outlook, with production expectations in the industry. now at an all time high ”.
Some economists believe Germany is facing a double dip recession this winter. However, its economy only stagnated in the last quarter of last year according to a preliminary estimate by the Federal Statistical Office, which said last week that gross domestic product had declined by 5% over the past year. 2020.
Several French companies have also “mentioned significant delays at certain suppliers which have contributed to the rise in the prices of raw materials, especially those of metals”.
Flash PMIs, released around 10 days before the final numbers and based on around 85% of typical responses, are the first comprehensive indicator of the economic impact of the new restrictions.