Eurozone business activity falls but sentiment picks up

Business activity in the eurozone fell for a fourth straight month in February but sentiment picked up as Covid-19 vaccines raised hopes about an economic revival.

IHS Markit's flash purchasing managers' index registered 48.1, up from 47.8 in January. February's result was broadly in line with expectations for a reading of 48.1 with 50 marking the difference between growth and shrinkage.

The index was dragged down by a decline in services to a three-month low of 44.7 as restaurants, bars and leisure facilities closed across the currency zone to stem coronavirus infections. Manufacturing, which is largely unaffected by the latest lockdowns, rose to a three-year high of 57.7 led by Germany, the eurozone's biggest manufacturing nation.

Business expectations for the next 12 months improved to the highest for almost three years and rose for both services and manufacturing as companies grew optimistic with vaccines rolling out across the eurozone.

Chris Williamson, IHS Markit's chief business economist, said: "Ongoing Covid-19 lockdown measures dealt a further blow to the eurozone’s service sector in February, adding to the likelihood of GDP falling again in the first quarter. However, the impact was alleviated by a strengthening upturn in manufacturing, hinting at a far milder economic downturn than suffered in the first half of last year."

Services activity dropped faster in Germany and France but the downturn eased slightly in the rest of the region. Manufacturing was supported by a surge in new business as Germany registered strong expansion and France returned to growth.

Manufacturing input costs rose at the fastest pace for almost 10 years as demand for raw materials surged, raising the prospect of stronger inflation. Supplier delivery times were their second longest since 1997, driven by demand and exacerbated by a lack of shipping containers.

Williamson said: "One concern is the further intensification of supply shortages, which have pushed raw material prices higher. At the moment, weak consumer demand – notably for services – is limiting overall price pressures, but it seems likely that inflation will pick up in coming months.”