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03 Feb 2021 | 09:53

Eurozone heads back to recession after January drop - PMI

(Sharecast News) - The eurozone's economy is on course for a return to recession after output shrank at a faster pace in January because of tougher Covid-19 restrictions. IHS Markit's composite purchasing managers' index for January dropped to 47.8 from 49.1 in December with a score of 50 separating growth from shrinkage. The final result for January was slightly better than an earlier "flash" estimate and market consensus of 47.5.

Economists said the January reading indicated the eurozone was likely to slip back into recession in the first quarter of 2020 with restrictions still in place in many countries as vaccines are rolled out.

Services were the main drag on the economy with activity dropping for a fifth month running. Many restaurants, bars and leisure facilities remain closed to stem high coronavirus infections with new strains of the virus emerging.

Manufacturing production, which has been less affected by restrictions, rose for a seventh successive month but at the slowest pace since returning to growth after the first series of lockdowns.

Chris Wiliamson, IHS Markit's chief business economist, said: "The eurozone economy endured a predictably tough start to 2021 as ongoing efforts to contain the spread of Covid-19 continued to hit business activity, especially in the service sector.

"A contraction of GDP therefore looks likely in the first quarter, though on current trends this should be modest in comparison to the falls seen in the first half of 2020."

Of the major economies covered in the survey only Germany grew, supported by its large manufacturing sector. Spain's score of 43.2 was made worse by bad weather and Ireland had the weakest score of 40.3, an eight-month low, as it was affected by the Brexit transition.

Staffing levels fell but at the slowest rate since the decline started early in the pandemic. Confidence about the future was little-changed from December.

Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, said: "Respondents are still optimistic about the future, a sentiment linked to hopes that vaccination eventually will be able to push the virus into the past. In the near-term, the economy will take a hit. We think the EZ economy will fall into a double-dip recession in Q1, with GDP falling by 1-to-2% [quarter on quarter]."

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