Decline in euro zone business activity eases in December, PMI shows

AI Sentiment: Cautiously Bullish
Reason: Despite ongoing challenges due to the pandemic and expected contraction in Q4 2021, the Euro Zone's business activity decline has eased and optimism for the future has increased, signalling potential for recovery.

In December, the decline in the Euro Zone's business activity eased, as indicated by the Purchasing Managers' Index (PMI). The IHS Markit's final composite PMI, which is seen as a good gauge of overall economic health, rose to 49.1 from November's 45.3, coming closer to the 50 mark that separates growth from contraction. However, it was slightly below the preliminary "flash" estimate of 49.8.

Despite the ongoing pandemic, the service industry in the Euro zone improved in December. The services PMI rose to 47.3 from 41.7 in November. It was also higher than the flash estimate of 47.3. The factory activity, on the other hand, expanded at a faster rate, with the manufacturing PMI rising to 55.2, down slightly from November's 55.6.

While the easing of the decline in business activity signals a potential recovery, the Euro Zone economy is still expected to contract in the final quarter of 2021. This comes as the region grapples with the ongoing effects of the COVID-19 pandemic, including new variants and restrictions that have continued to hamper economic activity.

The European Central Bank (ECB) has already predicted a contraction in the fourth quarter, following the third quarter's surprising 2.2% growth. The central bank has pledged to maintain an accommodative monetary policy until inflation reaches its target of 2%.

Despite the challenging economic conditions, businesses have remained optimistic about the future. The future output index, which measures optimism about the year ahead, rose to 61.9 from 60.1, its highest level since May.

In conclusion, while the Euro Zone economy is still facing significant challenges due to the ongoing pandemic, the easing of the decline in business activity and increased optimism for the future suggest potential for recovery in the coming months.