Eurozone business activity boom continues as US and UK start to slow

Eurozone economy updates

Eurozone businesses have reported their fastest expansion in activity for more than two decades, but companies in the US and UK lost momentum due to supply constraints and labour shortages.

IHS Markit’s eurozone flash composite purchasing managers’ index, based on a survey of businesses, rose to 60.6 in July, up from 59.5 in June, bolstering economists’ hopes of a rapid rebound this summer despite the spread of the Delta coronavirus variant.

A score over 50 indicates that a majority of businesses reported an expansion in activity from the previous month.

The eurozone PMI reading was the highest since July 2000 and outstripped the expectations of economists polled by Reuters, who had predicted a reading of 60. Eurozone companies’ orders rose at the fastest pace for 21 years.

“The eurozone is enjoying a summer growth spurt as the loosening of virus-fighting restrictions in July has propelled growth to the fastest for 21 years,” said Chris Williamson, chief business economist at IHS Markit.

By contrast, businesses in the US and UK reported a slowdown in their recent rapid pace of expansion as supply constraints, rising infections, subdued customer demand and shortages of workers weighed on the economic recovery despite the recent relaxation of Covid-19 restrictions.

The flash US PMI fell for the second consecutive month to 59.7 in July, below economists’ expectations and down from 63.7 in the previous month although it remained high by historical standards, IHS Markit said.

The services sector “recorded a further loss of growth momentum amid labour shortages”, IHS Markit said, although activity at US manufacturers accelerated slightly despite widespread supply chain disruption. US input cost and selling price gauges fell for the second consecutive month, it said, but some businesses reported customer hesitancy due to rising prices.

“Inflationary pressures and supply constraints — both in terms of labour and materials shortages — nevertheless remain major sources of uncertainty among businesses, as does the Delta variant, all of which has pushed business optimism about the year ahead to the lowest seen so far this year,” said Williamson.

The UK PMI published by IHS Markit and the Chartered Institute of Procurement and Supply fell to 57.7 in July, down from 62.2 in the previous month although still in expansionary territory.

The UK reading was lower than the 61.7 forecast by economists polled by Reuters, but remained well above its long-run historical average. Williamson said rising UK coronavirus infections had “subdued customer demand, disrupted supply chains and caused widespread staff shortages, and also cast a darkening shadow over the outlook”.

Line chart of Purchasing managers' index (over 50 = a majority of businesses reported an expansion in activity) showing Eurozone business activity hits 21-year high, survey suggests

The eurozone survey also found some early signs that the economic rebound may be close to losing steam. Business expectations for the year ahead dipped to a five-month low, down from an all-time high in June.

Ricardo Amaro, senior economist at Oxford Economics, said this showed “renewed virus-related headwinds have resulted in a deterioration of the balance of risks”.

Many eurozone companies are struggling to keep up with rising demand, which is causing shortages of materials such as semiconductors and steel and driving up the selling prices of goods and services.

The PMI for eurozone manufacturing dipped to a four-month low of 62.6, remaining at a historically high level and indicating a continued expansion of activity but showing more signs of being hit by supply bottlenecks and lengthening delivery times.

By contrast, eurozone services businesses reported their strongest rise in activity for 15 years. The services PMI rose to 60.4, up from 58.3 in the previous month.

Second-quarter eurozone output data due to be published next week are expected to show that the bloc has returned to growth after its double-dip recession over the winter, and the PMI figures indicate that the recovery is continuing in the third quarter, economists said.

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