Euro zone economic rebound is losing steam, survey finds

Surprise slowdown in pace of expansion comes after several months of improving sentiment

Disappointing data hit the euro in early trading on Friday and called into question the strength of Europe’s third-quarter economic recovery.

The euro zone’s economic rebound from the coronavirus pandemic is losing steam after several months of improvement, according to a widely watched survey of business activity.

The IHS Markit flash composite purchasing managers’ index for the bloc fell to 51.6 in August, down from 54.9 in July.

Although a reading above the 50 mark indicates a majority of businesses reported an expansion in activity, the reading undershot the expectations of most economists, who on average had expected activity to plateau, according to a Reuters poll.

The disappointing data hit the euro in early trading on Friday and called into question the strength of Europe’s third-quarter economic recovery.

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Rebound

After a historic contraction of more than 15 per cent in the first two quarters of this year, economists had until recently expected the euro zone economy to rebound strongly in the third quarter.

However, the recent resurgence of coronavirus infections in many European countries to levels not seen since May has triggered fresh quarantine requirements and localised lockdowns, raising doubts over the sustainability of the recovery.

“The recovery was undermined by signs of rising virus cases in various parts of the euro area, with renewed restrictions impacting the service sector in particular,” said Andrew Harker, economics director at IHS Markit, but he noted that “manufacturers continued to post marked increases in output and new orders”.

He said company orders continued to rise in August, but the pace of growth slowed, while “companies in the euro zone continued to reduce their staffing levels” to reflect muted underlying demand and business confidence.

Activity in both of Europe’s two largest economies fell below expectations, the sentiment surveys suggested.

France’s flash composite PMI fell from 57.3 in July to 51.7 in August, as business activity was hit by an unexpected contraction in the French manufacturing sector.

Meanwhile in Germany, it was the services sector that underwhelmed, offsetting a continued rebound in manufacturing and dragging the German composite index down from 55.3 in July to 53.7 in August.

“In France, we are particularly worried about the pace of job cutting having increased again in August,” said Moritz Degler, economist at Oxford Economics. “In Germany, while the rate of job cuts eased, both services and manufacturing employment continued to fall.”

The euro fell about 0.4 per cent against the dollar after the news broke. Stock markets, however, shrugged off the bad news and the Eurofirst 300 index was up 0.2 per cent.

Lockdowns

Christoph Weil, an economist at Commerzbank, said the data "confirm[ED] our assessment that there will be no V-shaped recovery in the euro area".

“Recent restrictions in response to rising infection rates are further delaying the recovery. We do not expect real GDP to return to pre-crisis levels until 2022,” he said.

Many of the new infections have been among young people and so far there has not been a big surge in hospitalisations or deaths. European leaders say they are determined to avoid renewed national lockdowns that froze large parts of the economy earlier this year.

German chancellor Angela Merkel said on Thursday: “We want to avoid closing borders again at any cost, but that assumes that we act in co-ordination.”

French president Emmanuel Macron said in an interview with Paris Match: “We cannot shut down the country, because the collateral damage of confinement is considerable.”

In the French manufacturing sector a declining proportion of businesses said activity had improved compared with the previous month, delivering a PMI reading of 49, a three-month low and down from 52.4 in July.

The PMI index for French services fell 5.4 points to 51.9, while in Germany the PMI for services fell 4.8 points to 50.8.

German manufacturing put in a relatively strong performance - its PMI reading was at a 23-month high of 53, up from 51 in July - although IHS Markit said continued cuts to factory employee numbers showed “there is still ground to make up and businesses remain under pressure to cut costs”.

Recovery

“Overall, today’s data suggest that the recovery is already starting to fade, at least outside the German manufacturing sector,” said Jessica Hinds, an economist at Capital Economics. “With no sign that the resurgence in virus cases has been stamped out, there is a clear risk that it stalls or even goes into reverse.”

By contrast Britain’s economy recovered extremely strongly in August, according to the latest purchasing managers’ index, with business activity growing reaching its strongest level in almost seven years. The flash composite PMI rose from 57 in July to 60.3 in August.

IHS Markit’s monthly business sentiment surveys are not a measure of the extent to which economic activity has recovered relative to pre-coronavirus levels and, while they signal how broad-based the recovery is, they cannot measure its pace.

The euro zone survey of about 5,000 companies was carried out between August 12 and 20. Flash PMI estimates are published one week before the final results and are based on about 85 per cent of the typical responses. – Copyright The Financial Times Limited 2020