Euro zone contraction deeper than thought in December but optimism rose

By Jonathan Cable

LONDON (Reuters) - Euro zone economic activity contracted more sharply than previously thought at the end of 2020 and could get worse this month as renewed restrictions to contain the coronavirus hit the bloc's dominant service industry, a survey showed.

With infection rates soaring across Europe, countries have clamped down on public life. Germany is set to extend its strict lockdown until the end of the month and Italy decided on Tuesday to keep some nationwide restrictions in place.

With many businesses shuttered, unemployment surging and debt hitting record highs, the European Central Bank rolled out yet more stimulus measures last month to lift the currency bloc out of a double-dip recession.

But the economy is expected to gain momentum later this year on vaccine hopes, a December Reuters poll found, and will return to pre-crisis levels within two years. [ECILT/EU]

IHS Markit's final December Composite Purchasing Managers' Index (PMI), seen as a good gauge of economic health, did rise to 49.1 from November's 45.3 but was significantly below a flash reading of 49.8. Anything below 50 indicates contraction.

"In this coronavirus environment the PMI numbers are already out of date. We can expect much weaker GDP than what these PMI numbers would suggest," said Bert Colijn at ING.

The services PMI registered 46.4 in December, better than the previous month's 41.7 but far weaker than the 47.3 preliminary estimate.

A lockdown kept Germany's services sector in contraction for a third month in a row in December and Italy's remained deep in negative territory, significantly undershooting analysts' expectations.

But French business activity came within a hair of returning to growth last month after a second coronavirus lockdown was lifted.

In Britain, outside the European Union, the economy made only a subdued return to growth in December after shrinking during a four-week England-wide coronavirus lockdown in November. [GB/PMIS]

A surge in infections there prompted Prime Minister Boris Johnson to set out a new, tougher lockdown on Monday. This will last until at least mid-February and economists think it will tip Britain back into recession.

With much of the euro zone's service industry being forced to close, demand also shrank a lot more than thought. The final services new business index was 46.6 compared to the flash estimate of 47.9, albeit better than November's 40.6.

But with vaccines being rolled out across the continent overall optimism about the year ahead improved. The composite future output index rose to 64.5 from 60.4, its highest reading since April 2018.

"We are in a darkness before dawn situation. There is light at the end of the tunnel but the tunnel is longer than we had initially expected," Colijn added.

(Reporting by Jonathan Cable; Editing by Catherine Evans)