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Euro zone business activity shrank in November, but optimism surged

Euro zone business activity contracted last month as governments across the bloc re-imposed strict lockdowns to quell a second wave of coronavirus infections, but optimism recovered on hopes for a vaccine, a survey showed.

The euro zone’s economy will shrink again this quarter, a Reuters poll predicted, but as a coronavirus vaccine comes closer and with expectations for additional support from the European Central Bank, quarterly growth forecasts for next year were upgraded.

IHS Markit’s composite PMI, seen as a good guide to economic health, sank to 45.3 in November from October’s 50.0, the level separating growth from contraction. That was, however, above an earlier flash reading of 45.1.

“There is a sense that after the initial reactions of businesses to the lockdowns, the second half of the month was better than anticipated. It’s still bad but not as bad as expected,” said Peter Dixon at Commerzbank.

A PMI covering the bloc’s dominant services industry sank to 41.7 from October’s 46.9, marking its third month below the break-even mark. That was its lowest reading since May, when the first wave of the virus was sweeping across Europe.

With hospitality venues forced to close, shops to shut and citizens encouraged to stay at home, demand slumped. The services new business index fell to 40.6 from 45.7.

Germany’s second lockdown pushed services there deeper into recession, bringing overall private-sector growth in Europe’s largest economy to a near halt. French business activity retreated as the already-suffering service sector was hit particularly hard.

Italy’s services industry contracted for a fourth month running. Spain’s also shrank again.

In Britain, outside the European Union, services shrank less than expected. A four-week partial lockdown in England had a smaller impact on companies than a lockown earlier in the year, but some analysts were cautious.

“Many businesses that were forced to close last month during the second lockdown will have seen revenues drop to near zero. The PMI, however, merely reflects whether firms’ activity is rising or falling, not by how much,” said Samuel Tombs at Pantheon Macroeconomics.

“Its past relationship with the GDP data, therefore, is bound to understate the damage caused by the lockdown.”

But overall optimism about the coming year improved and the euro zone composite future output index jumped to 60.4 from 56.5.

“The fact the vaccine is close at hand means there is reason for optimism in 2021,” Dixon said.
Source: Reuters (Reporting by Jonathan Cable; editing by Hugh Lawson, Larry King)

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