Spanish and Italian services sector rebound persists but Delta fears intensify

Eurozone economy updates

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Activity in Spain and Italy’s services sectors grew strongly last month as Covid-19 restrictions eased, according to a widely watched business survey, but the spread of the Delta coronavirus variant caused a dip in confidence about the prospects for the coming months.

IHS Markit’s purchasing managers’ index for the Italian services sector hit 58.0 in July, up from 56.7 in June to its highest level since 2007. A score over 50 indicates that a majority of businesses reported an expansion in activity from the previous month.

Looser coronavirus restrictions and the return of international travel boosted demand.

The pace of growth in Spanish services remained strong but eased month on month with the PMI dipping to 61.9, from June’s 62.5, which was the highest level since 2000.

Businesses said the emergence of the Delta variant had hit foreign demand for Spanish services, raising concerns about future activity, particularly in the hospitality sector. Confidence dropped to a four-month low.

“Firms indicated worries that any further rise in infection numbers could weigh on the recovery,” said Paul Smith, economics director at IHS Markit.

Spain’s tourism sector is particularly reliant on countries that have recently experienced an increase in Covid cases, such as the UK.

“The indicators so far are showing very little impact of the Delta variant on the economy, but it presents a substantial risk to the outlook,” said Nicola Nobile, economist at Oxford Economics.

The data came just days after business surveys pointed to a slowdown in the pace of expansion in the Spanish and Italian manufacturing sectors as goods producers experienced supply constraints and material shortages.

The Spanish manufacturing sector’s PMI was 59 in July, down from 60.4 in June. Italy’s was 60.3 in July, down from 62.2 the previous month, figures published on Monday showed.

Spanish and Italian companies in both the services and manufacturing sectors have been forced to push up prices in response to persistent inflationary pressures linked to supply chain disruptions, the surveys found.

Eurozone inflation rose to 2.2 per cent in July, up from 1.9 per cent in June and its highest level since October 2018.

But economists said the pressures were transitory and that inflation in Spain and Italy would return to pre-pandemic levels by next year.

“[Europe] is somewhat behind the United States in terms of reopening so we are seeing a later surge in economic growth. We expect it to level off a bit in [the fourth quarter] as some of the reopening effects fade out,” said Bert Colijn, economist at ING bank.

The eurozone economy is bouncing back from its historic pandemic-driven slump, logging faster than expected quarterly growth of 2 per cent in the three months to June, according to GDP data released last week.