Euro zone business surged in July but price pressures and COVID weigh

[August 04, 2021]  LONDON (Reuters) - Euro zone business activity raced ahead last month, expanding at its fastest pace in 15 years, as the lifting of more coronavirus restrictions and an accelerated vaccine drive injected life into the bloc's dominant service industry, a survey showed.

But supply chain disruptions and labour shortages meant input prices surged at the fastest rate in over two decades and fears of further curbs to contain the more infectious Delta variant of COVID-19 from spreading hit optimism.

IHS Markit's final composite Purchasing Managers' Index (PMI), seen as a good gauge of economic health, climbed to 60.2 last month from June's 59.5, its highest level since June 2006, well above the 50 mark separating growth from contraction, though slightly below a 60.6 "flash" estimate.

"Europe's service sector is springing back into life. Easing virus restrictions and further vaccination progress are boosting demand for a wide variety of activities, especially in tourism, travel and hospitality," said Chris Williamson, chief business economist at IHS Markit.

With more of the services industry reopening, the sector's PMI index rose to 59.8 from 58.3 in June, below the preliminary estimate of 60.4 but still its highest final reading since June 2006.

Manufacturing activity continued to expand at a blistering pace last month, a sister survey showed on Monday, but widespread shortages of materials and poor transport availability pushed the factory input prices index to its highest reading since the survey began in June 1997. [EUR/PMIM]

Inflationary pressures were also felt by services firms and the composite input price index nudged up to 69.9 from 69.8, its highest in nearly 21 years.

Meanwhile, a Reuters poll last month indicated that the biggest risk to the bloc's economic outlook was new COVID-19 variants and, with the Delta strain sweeping across Europe, the services business expectations index slipped to a three-month low of 69.1 from 72.7. [ECILT/EU]

"Worries about the Delta variant have become more widespread, ... subduing activity in some instances and raising concerns about the possibility of virus restrictions being tightened again," Williamson said.

"Hence services growth in July was slightly less marked than the earlier flash estimate and future expectations cooled, presenting a significant downside risk to the outlook and hinting that growth could begin to slow again as we head toward the autumn."

(Reporting by Jonathan Cable; Editing by Kevin Liffey)

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