Europe’s Economy Set to Contract Again as Lockdowns Bite

The European economy appears set for a fresh contraction in the final quarter of 2020, as business surveys indicate that lockdowns aimed at containing the coronavirus have led to a sharp decline in activity in the dominant services sector.

The new lockdowns mostly came into force in the final week of October. Although narrower than those introduced in the spring, the new measures appear to have hit those services that require close physical proximity almost as hard, while having less effect on most other activities. In Europe, the service sector represents about three-quarters of overall economic activity.

Manufacturing activity continues to be much less negatively affected than earlier in the year, but the decline in services appears sufficiently large to cause a drop in gross domestic product. If that materializes, the eurozone will be further from returning to the levels of output seen before the pandemic struck in the first quarter.

Data firm IHS Markit said its composite Purchasing Managers Index for the eurozone — a measure of activity in the services and manufacturing sectors — fell to 45.1 in November from 50.0 in October, reaching its lowest level since May. A reading above 50.0 indicates that activity is increasing, while a reading below points to a decline in activity.

The PMI for the services sector fell to 41.3 from 46.9 in November, pointing to an even larger decline in activity than in October. By contrast, the PMI for the manufacturing sector continued to point to an increase in activity, albeit at a slower pace. Similar surveys for the U.S. to be released later Monday are expected to point to continued growth in both sectors.

“The fall in the PMIs was far less severe than during the Spring lockdown, supporting our view that the hit to activity will be much smaller,” said Rosie Colthorpe, an economist at Oxford Economics, which expects the eurozone economy to shrink by 2.6% during the fourth quarter.

In the second quarter, eurozone GDP declined by 11.8%, and it rebounded by 12.6% in the third quarter.

Faced with a new lockdown, service providers cut jobs at a faster rate than in the previous month, according to the survey of purchasing managers, while the decline in manufacturing employment was less sharp. Overall, employment fell for the ninth straight month.

The divergent fortunes of the services and manufacturing sectors was evident in the performances of the eurozone’s two largest economies. The French economy relies quite heavily on consumer services, and saw a sharp decline in activity during November. Germany is more dependent on manufacturing goods for export, and its economy continued to expand.

A survey of U.K. purchasing managers pointed to a similar decline in activity, again concentrated in the services sector following a national lockdown that came into effect on Nov. 5.

The outlook for Europe’s economy over coming months will depend on whether the new lockdowns succeed in lowering infections to the point where restrictions can be eased again. Most are scheduled to end over the coming weeks, with the aim of reopening economies in time for the key Christmas period, although some restrictions are likely to remain.

However, IHS Markit reported that businesses had grown more upbeat about their prospects during November, as developers of vaccines designed to inoculate against the coronavirus reported higher-than-expected levels of effectiveness in the final phases of testing.

“Firms across both manufacturing and services have also become more optimistic about the year ahead, largely reflecting growing hopes that the recent encouraging news on vaccines will allow life to return to normal in the new year,” said Chris Williamson, IHS Markit’s chief economist.
Source: Dow Jones