Business activity across the eurozone contracted again in February as lockdown measures to contain the coronavirus hammered the bloc’s dominant service industry, a survey showed, even as factories had their busiest month in three years.

FILE PHOTO: A view shows the deserted Rue de Rivoli in Paris during a nationwide curfew from 8 p.m. to 6 a.m. in France, December 15, 2020. REUTERS/Gonzalo Fuentes/File Photo

With daily reported infections still high governments have been encouraging citizens to stay home and closed much of the continent’s hospitality industry while factories have largely remained open.

IHS Markit’s flash composite PMI, seen as a good guide to economic health, nudged closer to the 50 marks separating growth from contraction, registering 48.1 in February compared to January’s 47.8. A Reuters poll had predicted 48.0.

However, some of that activity was from completing old orders. The backlogs of the work index fell to 47.9 from 49.0.

“Ongoing COVID-19 lockdown measures dealt a further blow to the euro zone’s service sector in February, adding to the likelihood of GDP falling again in the first quarter,” said Chris Williamson, a chief business economist at IHS Markit.

The eurozone economy is in a double-dip recession, according to last week’s Reuters poll of economists, who said the risks to their already weak outlook were skewed more to the downside. [ECILT/EU]

A PMI covering the services industry fell to 44.7 from January’s 45.4, well below the median expectation in a Reuters poll for 45.9.

But with vaccination programs accelerating, driving hopes for a return to some form of normality, optimism about the year ahead improved sharply. The services business expectations index climbed to its highest since April 2018.

“Assuming vaccine roll-outs can boost service sector growth alongside a sustained strong manufacturing sector, the second half of the year should see a robust recovery take hold,” Williamson said.

Strong demand for manufactured goods helped the factory PMI soar to 57.7 from 54.8, the highest since February 2018 and well above all forecasts in a Reuters poll that predicted 54.3. An index measuring output, which feeds into the composite PMI, jumped to 57.5 from 54.6.

The new orders index also soared and factories hired additional staff for the first time in nearly two years. The employment index rose to 50.9 from 49.4.

A surge in demand for exports pushed activity in Germany’s manufacturing sector to a 36-month high in February as lockdown measures to contain the coronavirus pandemic pushed the services sector into a deeper contraction, a survey showed on Friday.

IHS Markit’s flash purchasing managers’ index (PMI) of activity in the manufacturing sector shot up to 60.6 from 57.1 in January, beating a forecast for fall to 56.5.

Reflecting differing fortunes in Europe’s biggest economy, activity in the services sector slowed to a nine-month low of 45.9 from 46.7 in January. This was below both the 50 mark separating growth from contraction and a forecast reading of 46.5.

As a result, the flash composite PMI, which tracks the manufacturing and services sectors that together account for more than two-thirds of the German economy, rose to a two-month high of 51.3 from 50.8 the previous month.

Germany went into lockdown in November and restrictions were tightened in mid-December to stem the coronavirus. Most of the measures that shut all non-essential businesses have been extended until March 7 as more contagious variants of the virus led to border controls being imposed with the Czech Republic and Austria.

“Ongoing weakness in services, where large parts of the sector remain either closed or disrupted by virus containment measures, continues to be counterbalanced by strong, export-driven growth across manufacturing,” said Phil Smith, Associate Director at IHS Markit.

He added that the survey had shown record reports of delivery delays and sharply rising input prices, pointing to increasing supply-side pressures.

“Looking further down the line, businesses are growing in confidence about the outlook for activity in the year ahead, with the vaccine roll-out hoped to bring an end to restrictions later in the year and help release pent-up demand,” he said.

British retail sales tumbled in January as shops went back into lockdown, official data showed, but lower-than-expected public borrowing gave at least some relief to finance minister Rishi Sunak as he prepares his next round of emergency spending.

FILE PHOTO: A closed sign is seen in a shop, as official figures are published for UK GDP in 2020, London, Britain, February 12, 2021. REUTERS/Toby Melville

Retail sales volumes slumped by 8.2% from December, a far bigger fall than the 2.5% decrease forecast in a Reuters poll of economists and the second largest on record.

“The only good thing about the current lockdown is that it’s no way near as bad for the economy as the first one,” Paul Dales, an economist at Capital Economics, said.

The smaller fall in retail sales than last April’s 18% plunge reflected the growth in online shopping.

The Office for National Statistics said public sector borrowing of 8.8 billion pounds ($12.3 billion) was the first January deficit in a decade, but the deficit was a lot less than a forecast of 24.5 billion pounds in the Reuters poll.

That took borrowing since the start of the financial year in April to 270.6 billion pounds, reflecting the surge in spending and tax cuts ordered by Sunak.

That figure does not yet include losses on government-backed loans which are likely to add 30 billion pounds to the shortfall this year, according to the Institute for Fiscal Studies think tank.

Sunak is expected to extend the government’s wage subsidies, at least for the hardest-hit sectors, in his budget statement on March 3, but he said on Friday the time would come for a reckoning.

“It’s right that once our economy begins to recover, we should look to return the public finances to a more sustainable footing and I’ll always be honest with the British people about how we will do this,” he said.

Some economists see higher taxes sooner rather than later.

“Big tax rises eventually will have to be announced, with 2022 likely to be the worst year, so that they will be far from voters’ minds by the time of the next general election in May 2024,” Samuel Tombs, at Pantheon Macroeconomics, said.

Public debt rose to 2.115 trillion pounds or 97.9% of gross domestic product, a share not seen since the early 1960s.

BOUNCE-BACK AHEAD?

Britain’s economy - which had its biggest slump in 300 years in 2020 when it contracted by 10% - will shrink by 4% in the first three months of 2021 before recovering thanks to the country’s fast COVID-19 vaccination program, the Bank of England says.

Prime Minister Boris Johnson has said he will lift the lockdown in England only gradually.

But a survey showed consumers were their most confident since the pandemic struck.

“The hope, and our expectation, is that when the lockdown is finally lifted, we will see a surge in consumer spending, rather than a more permanent scarring of the consumer confidence,” James Sproule, an economist at Handelsbanken, said.

Retail sales in January were down 5.9% compared with the same month in 2020.

Department stores and clothing stores saw the sharpest fall last month while online shopping rose to its highest ever share of total spending at 35.2%.

On the public finances, the ONS said central government tax receipts fell by just 800 million pounds from a year earlier, helped by self-assessed income tax payments which rose after a delay in an earlier deadline.

It also said there was a 300 million-pound revenue boost from customs duties, which until last month went to the European Union, and for the first time, Britain paid no contribution to the EU budget which used to average 1 billion pounds a month.