Euro area economic data maintains momentum, outlook clouded

Although researchers have as yet not confirmed the theory that Covid-19 will become a seasonal virus, growing evidence suggests that a small seasonal effect may probably contribute to bigger outbreaks in winter.

In point of fact, Europe is once more experiencing a surge in coronavirus infections, to levels not seen in months. A new mutation; the Omicron variant, emerging from southern Africa, sparked fears that the continent owing to its unprecedented set of genetic mutations may be engulfed with infections.

Conclusive evidence on such emerging mutation, due to its relatively recent discovery, is thus far unavailable. Early indications however point to one which carries a higher rate of transmissibility and having higher resistance to existing vaccinations. The repercussions, both from a health and economic viewpoint, the latter dependant on the ensuing course of action by governments to mitigate the spread and ultimately avoid overwhelming hospitals, remain unclear. Vaccination programmes and distribution of boosters - a third dose which shall further provide immunisation against the virus, shall aid to mitigate the impact. The vaccination rate among the largest Eurozone countries exceeds 70 per cent of the populations.

As concerns over the possible negative impact the Omicron variant will have on global economy rose, yields of European sovereigns, previously portraying an improved and more stable economic scenario, reversed. Notably, the yield on Germany’s benchmark 10-year bond headed lower, to below -0.34 per cent, the lowest in twelve weeks as investors sought safety.

While a downturn in economic data, consequent to measures imposed to mitigate the spread of the virus is expected, the extent is at this stage unknown. Recent economic data has been benevolent. Business activity, albeit moderating, showed renewed signs of improvement while Inflation maintained its upward trajectory.

Business activity in November rebounds

In November, Euro Area Manufacturing PMI rose to 58.4 from 58.3 in October, little changed from a preliminary estimate of 58.6. Still, November’s reading pointed to the second-slowest expansion since February 2021.

In manufacturing, new orders growth quickened while the pace of job creation remained largely solid. Meanwhile, as has been the case in recent surveys, November’s data showed still-considerable pressures being placed on suppliers. Average input lead times lengthened to a substantial extent once again, reflecting a number of factors including material shortages, the lack of transportation availability, and staffing issues. Pre-production inventories accumulated at the quickest degree since data were first collected in June 1997. Impact of such supply chain issues were evident in both input costs and output prices. Input costs, then translated onto customers in the form of higher selling prices, rose at an unprecedented pace. Output prices increased at the greatest extent since this series began in November 2002.

For a third successive month, services are seemingly set to outperform the manufacturing sector – constrained by supply issues which continued to restrict growth.

Notably, Services PMI rose to 56.6 from 54.6 in the previous month, and above market expectations of 53.5, preliminary estimates showed. On the back of slightly stronger inflows of new business, output growth accelerated from October's six-month low. From the employment front, the pace of job creation proved strong overall while backlogs of work increased at an elevated pace. Inflationary pressures persisted with input and output costs rising at record rates.

Finally, optimism about the outlook sank to a ten-month low amid lingering supply constraints and renewed coronavirus worries.

Inflationary pressures set to persist

In November, Eurozone consumer price inflation is expected to accelerate to 4.9 per cent year-on-year, from 4.1 per cent in the previous month, and above market estimates of 4.5 per cent. The rate of inflation would be the highest since July 1991, and well above the European Central Bank (ECB) target of 2.0 per cent.

Energy cost should rise sharply, followed by solid increases in prices of services, non-energy industrial goods, and food, alcohol & tobacco. Price increases in Europe's largest economies accelerated to multi-year highs, with sharp rates being recorded in Germany, Spain, Italy, and France.

A rise in infections may cloud economic outlook

Albeit noting a slight deceleration in the pace of expansion, economic data in the Euro area has largely been optimistic. Concerns surrounding the coronavirus pandemic, notably following a surge in infections across Europe, have however mounted. A rise in infections led governments once more to re-think the way forward and impose stricter rules to mitigate the spread and not to overwhelm hospitals.

The seriousness of the current coronavirus wave and economic impact set to prevail remain as things stand remain unknown. Countries will anxiously await more concrete information, on the new mutation variant. Its seriousness and risk it poses on the health front will be crucial in dictating the path going forward.

Indeed, should the need for further mitigation measures arise, the Euro Area economy may possibly, once more, falter. The rate of expansion of leading indicators, notably PMI data – a useful gauge of economic health in the two key sectors, already showing signs of normalisation as supply issues weighed on, may further ease.

A rise in infections may, once more, threaten to further increase supply issues while simultaneously divert spending from services to consumer goods. This, worsening the supply-demand imbalance.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

For more information visit https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.