Services sector hit by resurgence of virus but manufacturing resilient, survey finds

Business activity has slowed sharply in the eurozone’s two largest economies according to a widely-watched survey of companies, in an early indication that tighter restrictions to contain rising coronavirus infections may cause a double-dip recession in the bloc.
Both French and German services businesses reported a decline in activity in January, the survey by IHS Markit found, although manufacturing remained in expansion territory — underlining the two-speed economic impact of the pandemic’s second wave.
After chancellor Angela Merkel’s government introduced a tighter lockdown, German services businesses reported their fourth consecutive monthly contraction in January. The IHS Markit flash German services purchasing managers’ index fell to 46.8, down 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 which indicates that a majority of businesses reported a contraction in activity from 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 in the previous month. Economists polled by Reuters had expected a fall to 48.5.
“The French private sector started the new year as it ended the last, with Covid-19 restrictions driving a further decline in business activity,” said Eliot Kerr, economist at IHS Markit. “However, there [was] one big positive to be gleaned from the latest PMI data, and that was the return of employment growth.”
While output and new orders continued to fall overall, French companies increased their employee numbers for the first time in almost a year, with job growth in the services sector offsetting a decline in manufacturing jobs.
The index for French manufacturing remained in growth territory at 51.5, up slightly from 51.1 in December and above economists’ expectations. The composite PMI score for France — which combines services and manufacturing — was 47, down from 49.5 the previous month.
The continued contraction in German services was partly offset by resilience in manufacturing, which benefited from rising exports, particularly to China. The index for German manufacturing fell to 57 in January, down from 58.3 in the previous month but still well within expansion territory. The composite PMI for Germany dropped to a seven-month low of 50.8, from 52.
However, container shipping costs between Europe and Asia have quadrupled in the past eight weeks and IHS Markit said German manufacturers reported a “steep rise in prices” reflecting a “growing strain across supply chains, with surveyed businesses highlighting a combination of increasing demand for inputs, shortages and bottlenecks arising from limited freight capacity and a lack of available shipping containers”.
Phil Smith, associate director at IHS, said German manufacturers “are seemingly undeterred by the growing troubles on the supply side”, adding that many are “brimming with confidence about the outlook, with output expectations in the sector now at a record high”.
Some economists estimate that Germany faces a double-dip recession this winter. However, its economy only stagnated in the final quarter of last year according to a preliminary estimate by the Federal Statistical Office, which said last week that gross domestic product shrank 5 per cent over the course of 2020.
Several French companies also “mentioned severe delays at some suppliers which contributed to higher raw material prices, notably those of metals”.
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.