Supply shortages sap strength of euro zone recovery

By Jonathan Cable

LONDON (Reuters) - Euro zone business activity remained strong last month, despite fears about the Delta variant of the coronavirus and widespread supply chain issues, according to a survey which suggested the bloc's economy could be back to pre-COVID-19 levels by year-end.

IHS Markit's final composite Purchasing Managers' Index (PMI), seen as a good guide to economic health, dropped to 59.0 last month from July's 15-year high of 60.2, still well above the 50 mark separating growth from contraction but below a 59.5 "flash" estimate.

"Growth momentum in the euro zone is fading according to recent surveys and nowcast indicators. The big question is whether the recovery can carry on at a decent pace and quickly close the gap with pre-pandemic GDP," said Bert Colijn at ING.

The economy will grow 2.2% this quarter, a Reuters poll published earlier on Friday predicted and IHS Markit said the euro zone economy was on track to be back at pre-pandemic levels by the end of the year, if not sooner. [ECILT/EU]

But ongoing supply chain disruptions caused by the pandemic meant the cost of raw materials soared again this month. The input prices index was a near record 69.5 - although down from July's 69.9.

Inflation surged to a ten-year high of 3.0% in August with further rises likely, official data showed on Tuesday, challenging the European Central Bank's benign view on price growth and its commitment to look past what it deems a temporary increase.

Still, with much of the service industry reopening after the lifting of many restrictions its PMI remained well above breakeven at 59.0, albeit below July's 59.8 which was the highest reading since June 2006.

Services activity in Germany, Europe's largest economy, expanded at a strong pace as businesses which had been hit by coronavirus lockdowns catered for pent-up demand, although staff shortages and costs pressures put a dent in France's growth.

Italy's services industry recorded another month of steep growth, sustaining hopes of a strong economic rebound, and in Spain the sector expanded for the fifth month in a row as more COVID-19 travel restrictions were phased out.

In Britain, outside the common currency union, the recovery lost more momentum than originally estimated as staff shortages and supply chain issues weighed on companies in the country's huge services sector. [GB/PMIS]

Meanwhile, euro zone retail sales, a proxy for consumer demand, were much weaker than expected in July, pulled down mainly by a sharp fall in the number of goods bought online, official date showed.

Fears lockdown measures could be re-imposed have also put a dent in optimism. The euro zone services business expectations index in the PMI survey dipped to a four-month low of 68.9 from 69.1.

(Reporting by Jonathan Cable; Editing by Toby Chopra)