Europe’s recovery at risk from Covid wave, inflation pressure

Bloomberg

Euro-area business activity unexpectedly quickened, though the region’s recovery faces headwinds from a fresh wave of Covid-19 infections and “record inflationary pressures.”
IHS Markit’s composite Purchasing Managers’ Index rises to 55.8 in November from 54.2 in October, according to a survey of purchasing managers by IHS Markit published.
While that defies the median estimate in a survey of analysts that forecast the measure would retreat, it still points to weaker economic growth in the closing quarter of 2021, the report said.
That’s partly down to the pandemic’s latest surge across Europe, which looks set to cause renewed disruptions to the economy in December. Any new lockdowns are likely to hit the currently thriving services sector, while manufacturing is already suffering from a global supply squeeze. Inflation is proving an additional hurdle, according to IHS Markit’s chief business economist, Chris Williamson.
“With supply delays remaining close to record highs and energy prices spiking higher, upward pressure on prices has meanwhile intensified far above anything previously witnessed by the surveys,” he said. “Given the mix of supply delays, soaring costs and renewed Covid-19 worries, business optimism has sunk to the lowest since January, adding to near-term downside risks for the eurozone economy.”
The euro zone is now enduring the fastest inflation since the single currency was founded at the end of the 20th century, economists say.
Consumer prices in the 19-country region rise 4.5% in November, according to the median of 40 estimates in a Bloomberg survey. Every respondent predicts an acceleration from last month’s level of 4.1%, which already matched the fastest since the 2008 financial crisis.
In Germany, the cost-of-living squeeze is arguably even greater, with median estimate for inflation data now at 5.5%. The Bundesbank warned this week that the outcome there could even reach close to 6%.
Such unprecedented price spikes, reflecting surging energy costs and global supply bottlenecks, will add to the communication challenge of the European Central Bank, whose policy makers soon face a major decision on the future of stimulus. They insist this bout of inflation is transitory, while underlying pressures remain too weak to be self-sustaining.
A core measure of prices that strips out volatile items such as energy and food is also jumping. The outcome of 2.3% median prediction for that would be the highest since 2002.
The highest prediction for headline euro-zone inflation in the survey is by Capital Economics, whose economists expect 4.7%. The lowest is 4.2%, anticipated by six forecasters including Bank of America.

Euro-Area Inflation May Stay High for Longer
The Dutch central bank warned that high euro-area inflation could persist for longer than so far expected, according to a report.
“Factors — such as consumers’ pent-up demand, supply-chain bottlenecks and rising prices for energy and other commodities — while also ultimately transitory in nature, now appear likely to persist longer than initially thought,” the bank said. “The longer the current high inflation persists, the higher the risk that it becomes embedded in the behaviour of households and firms, thereby generating ‘second-round effects.’”

The report comes just weeks before a key European Central Bank meeting at which officials are set to plot a course away from crisis-support measures. The current inflation environment could “allow the ECB to phase out some of the most intrusive monetary-policy instruments,” the Dutch central bank said.
“For the last eight years, we have in vain conducted a kind of rain dance to get some more inflation — now the pandemic suddenly results in higher inflation,” ECB Governing Council member Klaas Knot, who heads the Dutch bank, told Nieuwsuur TV in an interview.
“The interesting question is: the factors that lead to temporarily higher inflation, how temporary are they?” he said. “If that will take longer than we think, we as central bankers will have to react.”