FX.co ★ EU business growth slowing down in December due to Omicron threat

According to a survey released on Thursday, Eurozone business growth has slowed down more than expected in December due to renewed restrictions aimed at limiting the outbreak of the Omicron strain of COVID-19. New quarantine measures have limited the recovery of the bloc's dominant service industry.

Eurozone business growth slow in December due to Omicron threat

Europe is facing the fourth wave of the pandemic, as many governments urge their citizens to stay at home and avoid unnecessary social contacts.

IHS Markit's Flash Composite Purchasing Managers' Index, a good indicator of overall economic health, dropped in December to 53.4 from 55.4 in November, reaching the lowest level since March. An earlier Reuters poll forecasted the index to reach 54,0 points.

The services PMI slumped to an 8-month low, reaching 53,3 compared to earlier level of 55.9. Although the index did not cross the 50,0 mark separating growth from contraction, it missed the predicted 54.1 points.

"The renewed decline in the Composite PMI in December suggests growth slowed to a crawl as tighter restrictions and growing consumer caution are taking their toll on economic activity, with the service sector bearing the brunt," Michael Tran at Capital Economics commented.

Growth of demand for services has reached the lowest level since April, with the new business index falling to 52.6 from 54.2.

Earlier data indicated that the growth of the private sector in Germany has stopped, as the service sector of Europe's biggest economy got hit by new restrictions.

The new variant of COVID-19 weighed down on business activity growth in France - the second economy in the Eurozone and the only other country in the bloc to report flash data.

The disappointing news comes after the recent EU industrial output data for October, which gave optimism to investors.

Outside the euro bloc, Omicron has already hit the UK hospitality sector and travel companies, sending private sector growth down to a 10-month low.

Nevertheless, the Bank of England has announced the winding down of economic stimulus and a gradual interest rate increase.

Earlier, investor betted against a rate hike with the ongoing coronavirus wave in full swing. Wednesday's data showed that the UK CPI beat market expectations and reached a 10-month high in November.

Weakening inflation pressure

The new coronavirus restrictions have also affected factories, which are generally less affected by quarantine measures. The manufacturing PMI declined to a 10-month low of 58.0 from November's 58.4. An index measuring output that feeds into the composite PMI nudged up to 53.9 from 53.8.

Price pressure has slightly declined but remained high, in one brighter spot for the policymakers at the ECB. The input prices index eased to 87.0 from 88.9. The output prices index declined even stronger.

"Price pressures have been easing in December, albeit only cautiously. It is a cautious sign of some easing pressures coming from supply shortages, which confirms some anecdotal evidence but it's way too early to conclude that the worst is behind us," said Bert Colijn at ING.

According to an expert poll by Reuters, the ECB is set to reduce monthly asset purchases twofold every month from April 2022. The interest rate increases are likely years away.

The optimism of market players about 2022 is improving as the rapid vaccine rollout continues, with the composite future output index recovering to 66.5 from 66.1.

"Forward-looking indicators also offered a glimmer of hope. Year-ahead sentiment improved marginally in December, in part due to hopes of further easing in supply-side disruptions following some encouraging signs in December," commented Ricardo Amaro at Oxford Economics.

A slight decrease in inflation could be attributed to falling demand due to the new wave of COVID-19, as well as the traditional period of discounts during the holiday season. The industry and retail sector are expecting a boom in the run-up to the holidays.

The actual economic situation and the true extent of the losses caused by COVID-19 would be only clear after the New Year's Day.