Eurozone growth slows as Omicron measures hit spending

Brussels: Economic growth in the eurozone slowed sharply in January, a key survey showed on Monday, as new coronavirus restrictions hit consumer spending, raising a new obstacle for the region´s recovery.

In its closely watched monthly survey, IHS Markit said the deceleration, which brought growth to an 11-month low, was completely attributable to the services sector, with manufacturers enjoying a reprieve from supply challenges and seeing a boost in activity.

The euro zone economic recovery weakened, despite an upturn in Germany where factories benefited from an easing in supply chain bottlenecks, as renewed restrictions put a dent in the bloc's dominant services industry.

With the Omicron coronavirus variant sweeping across Europe governments have been encouraging citizens to stay home and avoid socialising while soaring prices have discouraged consumers from spending.

IHS Markit said that the sky-high caseloads for the highly contagious Omicron variant had disrupted consumer-facing services through staff absences and continued social distancing.

The purchasing managers´ index (PMI) from IHS Markit dropped to 52.4 in January, after posting 53.3 points in December and hitting a high 59 points in August. A figure above 50 indicates growth.

Tourism, travel and recreation were "especially hard hit", said Chris Williamson, chief business economist at IHS Markit. However, he added that the impact on other parts of the economy was "relatively muted" and that the overall fallout from Omicron "so far looks less severe than prior waves".

The overall trend masked different situations in different countries. Germany, the leading European economy, recorded a rebound in activity in January, thanks to a robust increase in industrial production and a return to growth in the services sector, said IHS Markit.

On the other hand, growth in France reached its lowest level since April, with a near-stagnant industrial sector and a much weaker performance in its Omicron-hit services sector.

Rory Fennessy, economist at Oxford Economics, said the pickup in manufacturing "offers further reassurance that the region has passed the peak of supply-chain disruptions".

Despite the hit to services in January, "ultimately, Omicron should not significantly alter the overall growth outlook for 2022," he said.

With customers staying home, growth in demand for services almost dried up. The new business index sank to its lowest reading since April last year just before parts of the economy reopened after a stricter lockdown.

"The small decline in the flash Composite PMI in January shows that Omicron has taken a toll on the services sector, although the German economy performed surprisingly well," said Bert Colijn at ING.

Businesses in Germany expanded at their fastest pace in four months, earlier data showed, as factories enjoyed an easing in supply chain bottlenecks.

But in France, the only other euro zone country to report preliminary numbers, business growth dipped more than forecast as the impact of COVID-19 and inflationary pressures weighed on activity.

That suggests the bloc would have stumbled further without Germany's strength. In Britain, outside the euro zone and the European Union, activity cooled unexpectedly to an 11-month low but cost pressures stayed high, leaving the Bank of England on track to raise interest rates next week.

Further afield, factory activity in Japan grew at the fastest pace in four years although activity in the private sector as a whole slipped into contraction for the first time in four months as the services industry suffered amid a surge in coronavirus cases.

Consumers were also hit by rocketing prices. The euro zone composite output prices index matched November's survey high, and comes after inflation hit a record last month, likely adding pressure on the European Central Bank to tighten policy.

Factories, however, are less affected by restrictions and have largely remained open. The bloc's manufacturing PMI rose to a five-month high of 59.0 from 58.0, well ahead of the 57.5 Reuters poll estimate.

An index measuring output jumped to 55.8 from 53.8. The output measure feeds into the composite PMI and its big increase shows how much impact the services decline had on overall activity.

"The major news out of the release is that manufacturers are again noticing some abatement in supply chain problems. After cautious signs of improvements in December, things have materially improved in January," Colijn said.

To meet buoyant demand factories increased headcount at a rapid pace. The employment index soared to 57.5 from 55.3, its highest since July.

"With the number of new COVID-19 cases having peaked in some countries and some governments having already outlined plans to ease restrictions, euro zone economic activity should pick up a bit in February and March," said Andrew Kenningham at Capital Economics.