The composite PMI dropped to 47.5 in January from 49.1 in December. That decline was expected as the December survey was conducted ahead of the more stringent measures introduced in Germany and the Netherlands, which are now reflected in the January figures. Overall, compared to the first wave impact, the contraction in business activity indicated by the survey remains mild, but the impact of the second wave is much more widespread over time. The risk is that sectors bearing the brunt of this face a far more significant, longer-lasting impact, such as bankruptcy, with lockdowns being extended further into 1Q.
With that, over the course of the second wave, a K-shaped scenario unfolds. Multiple sectors continue to recover, while others continue to contract. Manufacturing is an outperformer, clearly. According to the manufacturing PMI, which dropped from 56.3 to 54.5, it continued to recover even in January, a reading still reflecting robust growth. Most parts of the economy that are affected by shutdowns and social distancing are part of the service sector, causing PMI services to drop further from 46.4 to 45. This shows substantial contraction.
Expect this pattern to continue with lockdowns now extended into February and more aggressive variants of the virus increasing the risk of further extensions being necessary. Moderating manufacturing growth and a sharp contraction in services will lead to a contraction in GDP in the first quarter. A bleak start to a year that should, as vaccinations take hold, see a quick turnaround in economic output at some point.