Euro zone business surged in July but price pressures and COVID weigh

By Jonathan Cable

LONDON (Reuters) - Euro zone business activity roared in July, expanding at its fastest pace in 15 years, as the lifting of more coronavirus restrictions and an accelerated vaccine drive injected life into the bloc's dominant service industry, a survey showed.

But supply chain disruptions and labour shortages meant input prices surged at the fastest rate in over two decades and fears of further curbs to contain the more infectious Delta variant of COVID-19 dented optimism.

IHS Markit's final composite Purchasing Managers' Index (PMI), seen as a good gauge of economic health, climbed to 60.2 last month from June's 59.5, its highest level since June 2006, well above the 50 mark separating growth from contraction, though slightly below a 60.6 "flash" estimate.

With more of the services industry reopening, the sector's PMI index rose to its highest final reading since June 2006.

"Across the bloc, the services PMIs remain comfortably in expansionary territory as the services sector benefits from easing restrictions," said Katharina Koenz at Oxford Economics.

Services activity in Germany, Europe's largest economy, expanded at a record pace. In France, the bloc's second biggest economy, growth remained elevated but dipped slightly more than originally thought.

Italy's services sector grew in July at its fastest rate for 14 years and although Spain's growth was off June's highs it remained strong.

In Britain, outside the euro zone and the European Union, private-sector growth slowed sharply due to supply-chain bottlenecks and high worker absences prompted by COVID-19 isolation requirements.

DELTA RISK

Manufacturing activity continued to expand at a blistering pace last month, a sister survey showed on Monday, but widespread shortages of materials and poor transport availability pushed the factory input prices index to its highest reading since the survey began in June 1997.

Inflationary pressures were also felt by services firms and the composite input price index nudged up to its highest in nearly 21 years.

Meanwhile, a Reuters poll last month indicated that the biggest risk to the bloc's economic outlook was new COVID-19 variants and, with the Delta strain sweeping across Europe, the services business expectations index slipped to a three-month low.

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"Looking ahead, downside risks to the 2021 outlook remain. For the services sector it will be pivotal to maintain the high vaccination speed to limit the spread of the already prevalent Delta variant," Koenz said.