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Eurozone PMI hints at COVID-19 economic rebound losing
momentum
Stronger upturn in manufacturing offset by near stalling of
service sector activity
Trends weakened across the board, though most noticeably in
Spain and Italy, where renewed contractions were recorded
Jobs continue to be cut as firms remain concerned about weak
demand
Service sector companies across the eurozone saw growth of
business activity grind almost to a halt in August, fueling worries
that the post-lockdown rebound has started to fade amid ongoing
social distancing restrictions linked to COVID-19.
The services PMI business activity index - which is the sector's
equivalent of the output index for manufacturing industry - fell to
just 50.5 in August, only slightly above the 50.0 no change
level.
The near-stalling needs to be viewed in the context of the
strong expansion seen in July, where the business activity index
had surged to a near two-year high of 54.7 as economies opened up
further from severe lockdowns designed to contain the COVID-19
virus. However, the latest reading still sends a disappointing
signal that the rebound has lost almost all momentum.
The larger size of the services economy means the subdued
picture offsets the more upbeat survey of manufacturers in August,
suggesting that the overall pace of economic growth has waned
midway through the third quarter. The composite PMI, which weights
together the output indices from manufacturing and services, fell
from 54.9 in July to 51.9 in August, despite the manufacturing
output gauge edging up from 55.3 to 55.6.
Growth in Germany and France contrasts with renewed
downturns in Spain and Italy
Performance weakened across all major single currency member
states in August, both in terms of service sector and overall
performance. Germany recorded the strongest services sector
expansion in August, followed by France, though in both cases rates
of expansion slowed markedly compared to July. Both Italy and Spain
meanwhile reported renewed downturns of service sector activity
after only relatively modest growth in prior months.
Where a reduction in activity was recorded, this was often
linked to worries of resurgent COVID-19 infection rates, notably
among consumer-facing companies and especially in Spain and Italy,
where virus containment measures remained particularly strict.
In contrast, manufacturing output rose in all four largest euro
economies during August as factories continued to rebuild
production capacity, led by the strongest surges in German and
Italian production for 30 months. Although growth of factory
production weakened in France and Spain, the overall rise in
eurozone manufacturing production was the largest since April
2018.
Measured across both manufacturing and services, Germany led the
expansion by a substantial margin, followed by France, with Italy
and Spain back in contraction territory.
Fourth quarter concerns
Although the relative strength of the PMI data in July and
August mean the autumn is likely to still see the economy rebound
strongly from the collapse witnessed in the spring, the August
survey highlights how policymakers will need to remain focused
firmly on sustaining the recovery as we head further into the
year.
Further weakness could be on the cards in coming months. Inflows
of new orders received by manufacturers rose at reduced rates in
August, whilst new business at services firms fell slightly, and
there are indications that firms are bracing for a renewed
weakening demand in the near-term. In particular, an overriding
theme of the August survey is one of firms taking a cautious
approach to costs and spending, notably in respect to investment
and hiring. Producers of investment goods such as plant and
machinery reported especially weak order book growth, and overall?
job losses remained more prevalent than at any time since the
region's debt crisis in 2013, despite widespread government
initiatives for companies to retain workers, amid continued worries
about the strength of future demand and uncertainty over the course
of the pandemic.
Job losses remained especially severe in the manufacturing
sector where the rate of job cutting eased from the recent
pandemic-related highs but remained quicker than at any time since
2009.
A far more modest rate of employment decline was seen in the
service sector, though even here the scale of job losses remained
higher than at any time seen over the seven years prior to the
pandemic.
Virus and policy to guide future
performance
Key determinants of whether the recovery can be sustained, or
whether we will see the economy "bounce and fade", will be the
future path of the virus and the policy response.
Based on current government notifications, the degree of
economic containment to prevent the spread of COVID-19 should ease
further in September and then more moderately so in October. The
IHS Markit COVID-19 Containment index for the region - for which a
reading of 100 indicates severe restrictions while a reading of
zero indicates no restrictions - has fallen from a peak of 82 in
April to 28 in August. Providing there are no further infection
waves, the index is projected to fall to 21 in September and 19 in
October, where it will remain for the rest of the year as certain
social distancing initiatives will remain in place. This further
easing of restrictions in the coming two months should help further
revive economic activity, but the degree to which the lockdowns are
being eased has moderated compared to earlier months in the opening
up of the economies, meaning the stimulus will be less marked.
Furthermore, there is a clear danger that containment measures
could be reintroduced if infection rates and deaths rise again.
Fiscal policy is therefore expected to continue to play a key
role in sustaining recoveries alongside accommodative monetary
policy. In terms of the latter, inflationary pressures remain low,
keeping the door open for loose policy. Average prices charged for
goods and services fell for a sixth straight month in August,
according to the PMI numbers. Input cost inflation also remained
historically low, albeit edging higher. These price pressure gauges
will need to be watched closely in coming months, as the future
path of inflation remains somewhat uncertain.
Key data in coming months
In summary, the third quarter should see GDP rebound sharply
from the second quarter, but there are signs that the services
sector has been hit by weakened demand from consumers in
particular, and that manufacturing is being supported by a wave of
pent up demand which could fade. Capacity across both sectors is
hence being scaled back amid worries about the outlook. The next
few months data will be all-important in assessing the
sustainability of the upturn.
Chris Williamson, Chief Business Economist, IHS
Markit
Tel: +44 207 260 2329
chris.williamson@ihsmarkit.com
Purchasing Managers' Index™ (PMI™) data are compiled by IHS Markit for more than 40 economies worldwide. The monthly data are derived from surveys of senior executives at private sector companies, and are available only via subscription. The PMI dataset features a headline number, which indicates the overall health of an economy, and sub-indices, which provide insights into other key economic drivers such as GDP, inflation, exports, capacity utilization, employment and inventories. The PMI data are used by financial and corporate professionals to better understand where economies and markets are headed, and to uncover opportunities.
