Omicron Slows Europe’s Economy but Supply-Chain Strains Ease

Surveys of purchasing managers in the first weeks of January that were released Monday indicate that activity in the services sector has taken the biggest immediate hit from Omicron, while manufacturing has been much less affected despite some shortages of workers.

There were few signs that Omicron has intensified supply-chain problems, although the new variant may yet prompt tighter shutdowns in key Asian manufacturing sectors. However, even as there were further signs of an easing of some blockages, businesses reported that they had raised their prices at a faster rate than over recent years.

In the eurozone, data firm IHS Markit’s composite Purchasing Managers Index–which measures activity in both the manufacturing and services sectors–fell to 52.4 from 53.3 to hit an 11-month low. A reading above 50.0 indicates that activity is increasing, while a reading below that threshold points to a decline.

However, the economic slowdown was entirely confined to the services sector, while manufacturing output rose at the fastest rate in five months.

“The Omicron wave has led to yet another steep drop in spending on many consumer-facing services at the start of the year,” said Chris Williamson, chief business economist at IHS Markit. “Most encouraging is the further easing of manufacturing supply chain delays despite the renewed virus wave.”

The surveys suggest that Omicron is taking a smaller toll on economic activity in Europe than previous surges of the virus, likely reflecting higher vaccination rates and a lower tendency for infections to lead to hospitalization and serious outcomes than in previous variants, with governments imposing less severe restrictions.

Economists expect the new variant to hold back the eurozone’s economic recovery in the early months of this year, but prove to have only a passing impact on growth.

“After a slowdown in growth, we expect economic activity to pick up later in the year,” said Rory Fennessy, an economist at Oxford Economics. “Ultimately, Omicron should not significantly alter the overall growth outlook for 2022.”

Japan and Australia also saw sharp slowdowns in services activity, although in contrast with Europe, they led to a decline in overall economic activity.

Eurozone businesses reported that worker absences due to infection were a drag on activity in both services and manufacturing, but they also reported a  further easing in supply-chain problems, and a slowdown in the rate at which their raw material and input costs were rising. However, they themselves raised their prices at the fastest pace on record, an indication that consumer-price inflation is set to remain high over coming months.

“While consumer inflation for goods is set to rise further in the months ahead, businesses did report the weakest rise in input prices since April, which could help to slow consumer inflation later in the year,” said Bert Colijn, an economist at ING Bank.

Write to Paul Hannon at [email protected]