Bottlenecks and Lockdowns Test European Faith in a Recovery

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European manufacturers are struggling to get supplies and their costs are surging at the start of 2021, testing their optimism that the economy will recover from the pandemic.

Supplier delivery times tracked by IHS Markit jumped in January by the most since the data started being collected in 1997, with the exception of last April when the pandemic shut factories worldwide. The blockages contributed to the steepest rise in input costs in nearly three years.

Germany, the region’s biggest economy reported limited freight capacity and a shortage of containers. That’s being echoed worldwide as shocks to supply chains from the disruption caused by the pandemic -- and factors such as Brexit -- threaten to stifle trade.

Bottlenecks and Lockdowns Test European Faith in a Recovery

So far, factories are confident the squeeze will pass. IHS Markit’s survey of purchasing managers showed optimism about the next 12 months improved to a three-year high for manufacturers, while falling slightly for service providers.

Sentiment climbed to the highest on record -- since 2012 -- among German manufacturers, and improved even in the U.K, where the nation’s departure from the European Union has exacerbated trade disruption.

Still, the latest strife is unwelcome just as the euro zone slides toward its second recession in a year. IHS Markit’s gauge of private-sector activity fell to 47.5 -- a measure below 50 signals contraction -- and services shrank at the second-fastest rate since May.

Bottlenecks and Lockdowns Test European Faith in a Recovery

“A double-dip recession for the euro-zone economy is looking increasingly inevitable,” said Chris Williamson, chief business economist at IHS Markit. “Some encouragement comes from the downturn being less severe than in the spring of last year, reflecting the ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year.”

What Bloomberg Economics Says

“The reading is consistent with the alternative, high-frequency indicators, such as electricity demand and mobility data, tracked by Bloomberg Economics. They suggest the level of activity in the monetary union was markedly lower in January than in December.”

-David Powell. To read his report, click here

A gauge for Germany indicated growth in January, but at the weakest pace since July when a recovery from the first wave of lockdowns was under way. France and the euro zone as a whole saw broad declines in output.

Employment across the currency bloc fell for an 11th month. Business expectations for the next 12 months fell back, after peaking in December, led by services.

European Central Bank President Christine Lagarde acknowledged the likelihood of another downturn on Thursday and said monetary and fiscal support must continue. She also expressed optimism that a recovery is near. The Governing Council kept its policy settings unchanged at its first meeting of the year.

“With lockdowns being extended further into the first quarter, the risk is that sectors bearing the brunt of this face a much more significant, longer lasting impact, such as bankruptcy,” Bert Colijn, senior euro-zone economist at ING Groep NV said in a report. “A bleak start to a year which should, at some point, see a quick turnaround in economic output as vaccinations take hold.”

©2021 Bloomberg L.P.

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