December 6, 2021

Europe’s Economy Springs Back to Life, but Shortages Boost Prices

Europe’s economy looks set for a return to growth in the three months through June, with business surveys pointing to a stronger-than-expected rebound in services activity during May, as government restrictions ease and consumers gain confidence in response to an acceleration in vaccinations.

However, Japan’s services sector suffered a deeper contraction in May as the government there extended restrictions on the hospitality sector in areas including Tokyo and Osaka through the end of the month.

Due to an increase in vaccine supplies, Europe has now delivered at least one dose to almost one-third of adults, double the share of one month ago. In response, governments have begun to ease restrictions on many services and consumers have become less wary of activities that involve close physical proximity.

The European Union said earlier in May that it expects its economy to return to its pre-pandemic size by the end of this year, about six months earlier than previously estimated, though still later than the U.S. Southern Europe’s economy was seen reaching its pre-pandemic size by the end of 2022.

Surveys of purchasing managers published Friday by data firm

IHS Markit

suggest that Europe’s recovery may be more rapid. Activity in France’s services sector rose to 56.6 in May from 50.3 in April, a much larger increase than the rise to 52.5 that was forecast by many economists. A reading above 50 points to an increase in activity.

As in many other parts of the world, manufacturing activity continued to increase at a strong pace. Combined with a rapidly reviving services sector, that pointed to the strongest month for the French economy since July, when tight restrictions were previously eased.

Across the eurozone, activity in the services sector grew at the fastest pace in more than three years, having barely returned to growth in April after seven months of contraction.

The surveys were released as the eurozone’s treasury chiefs met in Portugal, their first physical encounter since September 2020. But they sounded a note of caution, warning that support for the recovery will be needed if long-term damage to the currency area’s growth prospects is to be kept to a minimum.

“We can see a recovery taking hold, but we also know that the challenges remain great, that the risk of damage from this pandemic continues to be real,” said

Paschal Donohoe,

Ireland’s treasury chief and head of the group of eurozone ministers that coordinates economic policy.

The outlook for coming months appears promising, provided the pandemic can be held in check despite the spread of new variants of the virus. Businesses reported the fastest rise in new orders since June 2006. However, the speed of the rebound in demand appears to have taken some businesses by surprise and strained their supply chains. Manufacturers said they are having to wait longer than at any time in the survey’s history to take delivery of inputs.

“Growth would have been even stronger had it not been for record supply-chain delays and difficulties restarting businesses quickly enough to meet demand, especially in terms of rehiring,” said Chris Williamson, IHS Markit’s chief business economist.

Those capacity strains appear to be boosting prices. Manufacturers said the prices they paid for supplies and the prices they charge their customers rose at the fastest pace in the survey’s history. Services prices also rose, but much more modestly.

Speaking after her participation in the meeting of eurozone treasury chiefs, European Central Bank President

Christine Lagarde

said any pickup in inflation would likely be short-lived.

“The inflation numbers in ‘21, which we will see rising, are of a temporary nature and rely on temporary factors,” she said. “Supportive policies will continue to be needed.”

Similar surveys of U.S. businesses to be released later Friday are expected to record continued growth in both manufacturing and services, with the latter sector seen outpacing its European counterparts.

Write to Paul Hannon at paul.hannon@wsj.com

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