IHS Markit PMI: Eurozone rebound floundering as covid-19 fears rise

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Data from the IHS Markit Flash Eurozone PMI shows that business activity has stagnated this September, with the service industry in particular suffering badly.

IHS Markit say that the stagnation is partly down to rising cases of covid-19, which have prompted governments to introduce social distancing measures that have reduced demand for face-to-face services:

The flash IHS Markit Eurozone Composite PMI® fell for a second successive month in September, dropping from 51.9 in August to 50.1, indicating only a very marginal increase in business activity. Having rebounded sharply in July and, to a lesser extent, August from COVID-19 lockdowns during the second quarter, the PMI has since indicated a near stalling of the economy at the end of the third quarter as rising infection rates and ongoing social distancing measures curbed demand, notably for consumer-facing services.

A tale of two sectors

According to the PMI, the Eurozone’s services sector recorded its largest contraction of output since May, albeit with the rate of decline being much less than observed at the height of the pandemic.

On the plus side, IHS Markit’s data found that manufacturing output growth accelerated in the first two weeks in September – the fastest increase since February 2018. Germany saw the largest jump in manufacturing, while France recorded a more modest increase. Elsewhere, the manufacturing sector did grow, albeit more slowly.

Commenting on the data, Chris Williamson, Chief Business Economist at IHS Markit, says that a „two-speed economy is evident”:

„A two-speed economy is evident, with factories reporting that production growth was buoyed by rising demand, notably from export markets and the reopening of retail in many countries, but the larger service sector has sunk back into decline as faceto-face consumer businesses in particular have been hit by intensifying virus concerns.”

Unemployment continues to rise

Worryingly, the data shows that employment has dropped for the 7th month in a row. The most recent fall is relatively small compared to what happened in April, but is still the largest decline we have seen since June.

Margins squeezed

When it comes to goods and services, the PMI shows average prices in September fell at the steepest rate since June, down on average for a seventh consecutive month as companies feel the need to offer promotions to increase sales. To make matters worse, business costs have gone up for four months in a row, forcing margins to their lowest level since December 2018.

Cause for optimism

Despite the difficulties facing the services sector in the final months of the year, IHS Markit have found that businesses are optimistic coronavirus will be much less of a problem in 2021:

Looking ahead, business expectations about the coming 12 months hit the highest since February, improving in both manufacturing and services and across Germany, France and the rest of the euro area as a whole. Optimism stemmed mainly from the belief that disruptions from COVID-19 will ease over the course of the coming year.

However, as Chris Williamson points out, this optimism often depends on infection rates falling, and there is no guarantee of this happening in the coming months. Therefore the fear is that the weak economic performance seen in September will worsen, resulting in a recession in the last quarter of 2020.

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