COVID - 19: Euro zone business growth weaker than expected

Sept 23 Reuters - Euro zone business growth was much weaker than expected this month as curbs to limit the Delta variant of coronavirus hit demand and already worsened supply-chain constraints pushed input cost rises to over two-decade high, a survey showed.

Despite daily infection rates dropping significantly over the last month, most remaining restrictions are unlikely to be lifted anytime soon in major economies, including Germany and France, on concerns over how the pandemic might develop in the months ahead.

IHS Markit's Flash Composite Purchasing Managers Index, a good gauge of overall economic health, fell to a seven-month low from 59.0 in September from 56.1 in August.

Although it was below the 50 level of growth in contraction for the seventh successive month, it remained well below a Reuters poll estimate of 58.5.

The September PMIs suggest that the pace of recovery slowed further at the end of Q3, in part as the euro zone economy approaches its pre-virus size but also as supply shortages continue to bite, said Jessica Hinds, Europe economist at Capital Economics.

Price pressures remain intense and sky-high energy prices suggest that these are unlikely to ease any time soon. Those supply distortions - one of the primary drivers of prices throughout the world over past months - are far from resolved and the trend of higher inflation is here to stay. A subindex tracking input costs throughout the bloc hit its highest in 21 years.

European Central Bank policymakers recently acknowledged the risk that the cost growth would exceed their relatively benign projections, but will trim emergency bond purchases over the coming quarter.

The Ifo Institute has cut its 2021 growth forecast for Germany to 2.5%, pointing to supply chain disruptions.

The procurement managers' surveys told the same story with Germany and France - the bloc's two biggest economies - suffering slowdowns as the bottlenecks put a brake on activity. Both the manufacturing and services sectors grew at a weaker than expected pace.

Outside the Currency Union, in Britain the economy also lost more momentum as businesses grappled with rising costs.

Optimism about future output fell to an eight-month low. That contrasts with a rising consumer sentiment according to the latest European Commission data.

Supply constraints are impacting confidence. The weaker confidence was among other things, said Peter Vanden Houte, chief economist at ING.

New services business in the bloc has expanded at its slowest pace in five months according to the PMI survey.

The rapid demand pressure led factory to hire at the slowest pace in six months. During the same period, their backlogs of work was expanding at a slower pace, signaling worsening supply constraints.

Overall, today's data confirm our expectation that economic growth will weaken in the final quarter due to the ECB's forecast, said Christoph Weil, senior economist at Commerzbank.