Supply constraints squeeze euro zone business growth

By Indradip Ghosh

(Reuters) - Euro zone business growth was much weaker than expected this month as curbs to limit the Delta variant of coronavirus hit demand and already worsened supply-chain constraints pushed input cost rises to an over two-decade high, a survey showed.

Despite daily infection rates slowing significantly over the past month, most remaining restrictions are unlikely to be lifted anytime soon in major economies, including Germany and France, on concerns over how the pandemic might develop in the months ahead.

IHS Markit's Flash Composite Purchasing Managers' Index, a good gauge of overall economic health, fell to a five-month low of 56.1 in September from 59.0 in August.

Although it stayed above the 50 level separating growth from contraction for the seventh consecutive month, it was well below a Reuters poll estimate of 58.5.

"September's PMIs suggest that the pace of recovery slowed further at the end of Q3, in part as the euro zone economy approaches its pre-virus size but also as supply shortages continue to bite," said Jessica Hinds, Europe economist at Capital Economics.

"Price pressures remain intense and sky-high energy prices suggest that these are unlikely to ease any time soon."

Those supply distortions - one of the primary drivers of prices throughout the globe over past months - are far from resolved and the trend of higher inflation is here to stay. A sub-index tracking input costs throughout the bloc hit its highest in 21 years.

European Central Bank policymakers recently acknowledged the risk price growth may exceed their relatively benign projections, but will trim emergency bond purchases over the coming quarter.

The Ifo institute on Wednesday cut its 2021 growth forecast for Germany to 2.5%, pointing to supply chain disruptions.

The purchasing managers' surveys told the same story with Germany and France - the bloc's two biggest economies - suffering slowdowns as the bottlenecks put a brake on activity. Both manufacturing and services sectors grew at a weaker than expected pace.

In Britain, outside the currency union, the economy also lost more momentum as businesses grappled again with rising costs. [GB/PMIS]

DEMAND WANES

Optimism about future output fell to an eight-month low. That contrasts with improving consumer sentiment, according to the latest European Commission data.

"Supply constraints are increasingly weighing on confidence. The weaker confidence was across the board," said Peter Vanden Houte, chief economist at ING.

New services business in the bloc expanded at its slowest pace in five months, according to the PMI survey.

Weakening demand led factories to hire at the slowest pace in six months. Meanwhile, their backlogs of work expanded at a robust pace again, signaling worsening supply constraints.

"Overall, today's data confirm our expectation that, contrary to the ECB's forecast, economic growth in the euro area will weaken significantly in the final quarter," said Christoph Weil, senior economist at Commerzbank.

(Reporting by Indradip Ghosh; Editing by Hugh Lawson)