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Euro zone contraction deeper than thought in December but optimism rose

Euro zone economic activity contracted more sharply than previously thought at the end of 2020 and could get worse this month as renewed restrictions to contain the coronavirus hit the bloc’s dominant service industry, a survey showed.

With infection rates soaring across Europe, countries have clamped down on public life. Germany is set to extend its strict lockdown until the end of the month and Italy decided on Tuesday to keep some nationwide restrictions in place.

With many businesses shuttered, unemployment surging and debt hitting record highs, the European Central Bank rolled out yet more stimulus measures last month to lift the currency bloc out of a double-dip recession.

But the economy is expected to gain momentum later this year on vaccine hopes, a December Reuters poll found, and will return to pre-crisis levels within two years.

IHS Markit’s final December Composite Purchasing Managers’ Index (PMI), seen as a good gauge of economic health, did rise to 49.1 from November’s 45.3 but was significantly below a flash reading of 49.8. Anything below 50 indicates contraction.

“In this coronavirus environment the PMI numbers are already out of date. We can expect much weaker GDP than what these PMI numbers would suggest,” said Bert Colijn at ING.

The services PMI registered 46.4 in December, better than the previous month’s 41.7 but far weaker than the 47.3 preliminary estimate.

A lockdown kept Germany’s services sector in contraction for a third month in a row in December and Italy’s remained deep in negative territory, significantly undershooting analysts’ expectations.

But French business activity came within a hair of returning to growth last month after a second coronavirus lockdown was lifted. –