The European Central Bank headquarters in Frankfurt, Germany.

A slowdown in eurozone business activity accelerated in January, making a new recession almost certain as the COVID-19 pandemic continues to batter the economy, a key survey showed on Friday.

The closely watched PMI index compiled by IHS Markit is considered the earliest indicator of the state of the economy and the latest reading confirmed fears that the year-old virus crisis is still going strong.

“A double-dip recession for the eurozone economy is looking increasingly inevitable as tighter Covid-19 restrictions took a further toll on businesses in January,” Chris Williamson, chief business economist at IHS Markit, said.

This meant that the economies of the 19 countries that use the single currency, dominated by Germany and France, would sink back into recession after only a very short recovery over the European summer.

The firm’s closely watched PMI index fell from 49.1 points in December to 47.5 points this month, further away from the 50-point level which indicates growth.

Williamson noted however that the bad start to 2021 would be less damaging than the economic collapse seen in the first wave of the pandemic last year.

This was due to the “ongoing relative resilience of manufacturing, rising demand for exported goods and the lockdown measures having been less stringent on average than last year,” he said.

The difference between France and Germany was notable.

German exports managed to keep the country narrowly on a growth trajectory, while French business activity sank.

The situation for the rest of the eurozone, accounting for a little more than half of the bloc’s economy, was even worse.

Worryingly, employment across the eurozone fell for an eleventh consecutive month, albeit with modest increases in France and Germany, IHS Markit said.

The bleak picture confirmed a warning by European Central Bank chief Christine Lagarde who saw “serious risks” still looming over the eurozone economy. Much hope has been put in the distribution of vaccinations to reopen the economy but the campaign in the EU is going at a slower pace than hoped.

The rollout of vaccines had instilled “a strong degree of confidence” but “the recent rise in virus case numbers has caused some pull-back in optimism,” Williamson said.

IHS Markit on Friday also posted an alarming survey result for Britain, where activity collapsed from a modest expansion in December to a low 40.6 points in January.

The country, which left the EU’s single market on January 1, has seen a series of damaging lockdowns due to the spread of a more contagious strain of the virus.

European Central Bank: European Central Bank policymakers are set to delve deeper at their next meeting into how they measure borrowing costs in the virus-hit euro zone economy after failing to reach an agreement this week, four sources told Reuters.

The ECB has pledged to maintain “favourable financing conditions” to help the bloc recover from the economic shock of the pandemic, but it has never spelled out how those are measured.

The issue is crucial as it determines how many bonds the ECB will buy under its pandemic-fighting scheme, which is the object of some market speculation after the bank said on Thursday it did not need to exhaust its 1 trillion euros of remaining firepower.

Policymakers will hold a seminar at their March 10-11 policy meeting and debate which indicators should be included, whether they should be looked at individually or condensed into an index, and how this should be communicated -- if at all, the sources said. Not all policymakers are convinced about the merit of an index as that would tie their hands by preventing them from focussing on stresses that may be building only in certain corners of the economy, one source said.

And the notion of making that information public is also making many nervous in light of recent history, some of the sources added.

Former President Mario Draghi made a rod for his own back by elevating a certain market-based measure of long-term inflation expectation as the ECB’s favourite, causing market participants to obsess about it and ultimately reducing its informative value.

An ECB spokesman declined to comment.

President Christine Lagarde raised more questions than answers on Thursday when she said the ECB was not just looking at the bond market, but rather making a “holistic assessment” of “multiple indicators” without elaborating.