Surge in infections may worsen supply chains, dent PMI data

A recent rise in coronavirus infections may possible worsen an already tensed situation

A fourth wave of coronavirus infections is raging across continental Europe, forcing governments, once more, to take drastic actions to mitigate the spread of the virus and stop from hospitals being overwhelmed.

Austria, Germany, and the Netherlands have experienced Western Europe’s fastest increase in cases since the start of the month. Governments, albeit aware of the economic repercussions set to pan out, responded. Amongst all, Austria’s government have thus far took the most stringent actions, imposing a three-week national lockdown and making vaccinations compulsory as from February 1, 2022. Germany is restricting access to public places for the unvaccinated, while Netherlands is shutting restaurants and bars early.

Indeed, the countries suffering the most from a rise in infections and thus having to react strongly against the threat the virus poses, were those where the vaccination coverage is low. Austria’s vaccination rollout, thus far covering 65 per cent of the population, remained susceptible to many political forces, vaccine sceptics, and spreaders of fake news. Also, a mid-summer declaration that the pandemic has been “mastered” with a vaccination campaign, far from being complete, did not help. In Eastern Europe, the situation is far worse amid a notably lower vaccine uptake. Bulgaria, Europe’s worst in terms of vaccine coverage, saw the death rate surging, reaching an all-time high in recent weeks. Only last Friday, the EU international market commissioner in charge of the vaccine strategy rollout, Thierry Breton encouraged Bulgaria to speed up its vaccination campaign to limit the health risks for both its citizens and Europe at large.

Consequent to such rapid rise in infections and renewed mitigation measures, the Euro area economy may possibly, once more, falter. The rate of expansion of leading indicators, notably PMI data – a useful gauge of economic health in the two key sectors, already showing signs of normalisation as supply issues weighed on, may further ease.

Supply chain bottlenecks may possible worsen

Supply bottlenecks - in our view the key source to inflationary pressures, is a phenomenon we’ve been witnessing in 2021. Disruptions worsened by a second coronavirus wave, a blockage in the Suez Canal earlier in March, port closures, and capacity limitations, have over the year seemingly persisted.

A recent rise in coronavirus infections may possible worsen an already tensed situation. The shift of retail consumption in favour of goods rather than services, may once more be envisaged. That said, supply chains, thus far proving vulnerable – even if caused by excess demand, may further experience disruptions.

For instance, sea ports, should lockdowns continue to be reinstated, may face limitations in terms of container handling, inevitably impacting loading, and further increasing supplier delivery times – a key barometer of supply delays.

Services may pose a drag on Euro area’s economic recovery

In the midst of the pandemic’s first and second wave, services – reliant on contact, was inevitably heavily impacted as mitigation measures were imposed by governments and health authorities to reduce the spread of the virus.

Economic activity significantly improved, with coronavirus-induced restrictions on movement and a vaccination drive being well-underway, proving crucial in curbing the spread of the deadly virus. Then, the gradual easing of pandemic-inflicted movement restrictions combined with monetary and sizeable fiscal support allowed economies to both reopen and rebound from worrying lows.

The scenario today differs.

With supply shortages worsening, manufacturing growth is likely to remain subdued for some time to come, leaving the economy reliant on the service sector to drive growth. With that said, we expect overall activity to possibly thread lower amid the imposition of renewed virus battling restrictions. The extent of such decline in rate of expansion, largely reliant on the coronavirus persistence and supply-side issues, however, remains in question.

Upticks in inflation may possibly persist amid supply bottlenecks

As a result of the intense supply-side issues, but also as a consequence of rising costs for energy, fuel, and employment, input price inflation hit record highs in October. Businesses, to combat greater cost burdens, translated price increases onto customers, also, at a record pace.

Should demand remain at similar levels, such scenario; portraying elevated inflation, is set to persist at least in the short-term, particularly as supply chain disruptions are ought to linger. Should demand however drop and thus balance out with supply, pricing pressures should abate.

Albeit the persistence of such price increases led markets to price in a faster pace of policy tightening from central banks, it is now seemingly not the right time for the European Central Bank (ECB) to get dragged into premature rate rises.


Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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