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A stronger expansion of business activity in November defied
economists' expectations of a slowdown, but is unlikely to prevent
the eurozone from suffering slower growth in the fourth quarter,
especially as rising virus cases look set to cause renewed
disruptions to the economy in December.
A mix of near-record supply delays, an unprecedented surge in
prices and renewed COVID-19 worries has meanwhile pulled business
optimism to the lowest since January, adding to near-term downside
risks for the eurozone economy.
Economy slows in Q4
The headline IHS Markit Eurozone Composite PMI rose for the
first time in four months in November, climbing from 54.2 in
October to 55.8 according to the 'flash' reading*. Although
indicating an improvement in the rate of growth from October's
six-month low and remaining above the survey's pre-pandemic
long-run average of 53.0, the average reading for the fourth
quarter so far, at 55.0, is substantially lower than the 58.4
average seen in the third quarter, pointing to a weakening of
economic growth in the closing quarter of 2021.
IHS Markit Eurozone PMI and GDP
Service sector drives upturn
By sector, services outperformed manufacturing for a third
straight month, recording the strongest growth of activity for
three months. Growth also picked up in manufacturing, though
remained the second-weakest seen over the past 17 months.
Eurozone PMI output growth by sector
Both sectors saw growth improve on the back of slightly stronger
inflows of new business, yet in both cases rates of growth of
demand remained well below that seen during the summer months.
In manufacturing, growth was held back in particular by a third
successive monthly drop in production in the autos sector. More
positively, especially robust expansions were seen for tech
equipment, food & drink and household goods.
In the service sector, the weakest performance was recorded for
tourism & recreation, where growth hit the lowest since May due
primarily to rising virus infection rates.
Germany remains weak spot
By country, growth accelerated in Germany and France, with the
latter recording the stronger expansion for the second month in a
row thanks to the sharpest rise in services activity for nearly
four years, which offset a second successive monthly drop in
factory output. The rest of the region as a whole meanwhile enjoyed
faster growth of both manufacturing and services than seen in
France and Germany.
Especially weak factory output growth was again seen in Germany
alongside a subdued service sector expansion, though in both
sectors, the rate of growth improved on October.
Composite PMI output growth
Service sector leads upturn as manufacturing reports
supply woes
Weak factory output growth was again commonly attributed to
supply constraints. Suppliers' delivery times continued to lengthen
at one of the steepest rates seen over more than two decades of
survey history, easing only modestly compared to October, amid
ongoing supply shortages and transport problems.
Eurozone manufacturing inventories and delivery
delays
Fears over supply issues contributed to further inventory
building by manufacturers, with November seeing a record build-up
of warehouse stocks for the second month running as firms increased
their purchases of available inputs.
Jobs growth holds close to two-decade high but backlogs
still rise
Despite hiring stepping up across both manufacturing and
services, resulting in the second-largest gain in employment
recorded over the past 21-years, backlogs of work continued to rise
at an elevated pace, increasing at the sharpest rate for three
months to hint at ongoing constraints. Backlogs rose more sharply
in manufacturing, led by Germany, but also grew to an increased
extent in services.
Record price hikes
Shortages were meanwhile once again seen as a principal driver
of higher prices for many goods and services, alongside higher
shipping costs, rising energy prices and increases in staff costs.
November consequently saw a survey record increase in firms' input
costs for a second successive month, with unprecedented rates of
inflation recorded in both manufacturing and services.
Eurozone manufacturing prices and supply
delays
Selling price inflation likewise accelerated in both
manufacturing and services to the fastest in almost two decades of
comparable survey history as firms sought to pass higher costs on
to customers, most notably in Germany.
Eurozone prices
Eurozone inflation
Outlook
Finally, future output expectations deteriorated to the lowest
since January. Ongoing concerns over supply chain issues were
exacerbated by growing worries about the impact of further COVID-19
waves, which darkened the outlook for services in particular.
Optimism in manufacturing improved from October's one-year low,
though remained subdued by supply and price worries.
Thus, while a stronger expansion of business activity in
November defied economists' expectations of a slowdown, it is
unlikely to prevent the eurozone from suffering slower growth in
the fourth quarter, especially as rising virus cases look set to
cause renewed disruptions to the economy in December.
The manufacturing sector remains hamstrung by supply delays, and
the service sector's improved performance may meanwhile prove
frustratingly short-lived if new virus fighting restrictions need
to be imposed. The travel and recreation sector has already seen
growth deteriorate sharply since the summer.
Not surprisingly, given the mix of supply delays, soaring costs
and renewed COVID-19 worries, business optimism has sunk to the
lowest since January, adding to near-term downside risks for the
eurozone economy and complicating the picture for a central bank
that is concerned over the upsurge in inflationary pressures and
rise in asset prices.
Eurozone PMI and ECB policy decisions
IHS Markit's November forecast update puts eurozone real GDP
growth at a little under 0.5% q/q in the fourth quarter of 2021 and
the first quarter of 2022, much slower than the average growth rate
of over 2% seen in the second and third quarters of 2021. Growth
should then pick up as supply-chain disruptions and
COVID-19-related constraints ease, but at 3.7% our 2020 eurozone
GDP forecasts are currently around half a percentage point below
the consensus.
Just as growth picks up again in 2022, base effects should help
cool inflation. Our
current forecast for the average HICP inflation rate in the
fourth quarter of 2022 is just 1.4%. though this assumes no
significant pick up in pay growth, which remains a key area of
uncertainty.
The increasingly elevated inflation rates that we are likely to
see in the coming months will nevertheless add to the call from
some ECB policymakers for a faster withdrawal of policy stimulus.
We therefore expect the ECB to cease net asset purchases under the
Pandemic Emergency Purchase Programme (PEPP) in March 2022, in line
with the ECB's forward guidance, but the ECB's rate hike cycle is
expected to begin only in the first half of 2024. That said, the
recent upsurge in COVID-19 cases opens up the possibility of a more
extended period of net asset purchases.
*The flash estimate is typically based on approximately
85%-90% of total PMI survey responses each month and is designed to
provide an accurate advance indication of the final PMI
data.
Chris Williamson, Chief Business Economist, IHS
Markit
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
