The downturn in European business activity slowed markedly in June as restrictions to contain the coronavirus crisis were eased, according to a closely watched survey that added to signs of a recovery in the region’s economy.
Businesses reported stronger signs of normalisation than expected in both the services and manufacturing sectors as curbs linked to the pandemic were lifted and consumption resumed.
The IHS Markit flash composite purchasing managers’ index for the eurozone, a gauge of private sector activity, rose to 47.5 in June, up from 31.9 in May. Yet the reading is still below the 50 mark, which indicates a majority of businesses reported a contraction in activity compared with the previous month.
“Output and demand are still falling but no longer collapsing,” said Chris Williamson, chief business economist at IHS Markit. “While second-quarter GDP is still likely to have dropped at an unprecedented rate, the rise in the PMI adds to expectations that the lifting of lockdown restrictions will help bring the downturn to an end as we head into the summer.”
June’s uptick in sentiment reflects the easing of the lockdown; the proportion of businesses that said activity had improved compared with the previous month increased from May. But the sentiment surveys are not a measure of the extent to which economic activity has recovered relative to the pre-virus level and, while they signal how broad-based the recovery is, they cannot measure its pace.
“Today’s PMI numbers provide further evidence of what initially looks like a textbook V-shaped recovery,” said Carsten Brzeski, economist at ING. But, he warned, “higher unemployment, companies going bust, as well as plans to further cut back on staff and falling orders, suggest that the current V-shaped recovery could quickly run out of steam”.
Real-time indicators of economic activity, such as heavy goods vehicle traffic on toll roads, electricity use and footfall in shops, have all bounced back strongly across Europe in recent weeks as virus-related restrictions have been loosened. But some social distancing rules remain and overall business and consumer activity is still below pre-pandemic levels.
The European Central Bank expects the eurozone economy to contract by 13 per cent in the second quarter of this year and, despite starting to recover in the second half, it does not expect a return to its pre-pandemic level until 2023.
The eurozone PMI index for manufacturing rose to 46.9 in June from 39.4 in May, while the index for services climbed to 47.3, up from 30.5. The downturn in output was linked to a fourth consecutive monthly deterioration of inflows of new business, and job losses continued although at a slower pace, IHS Markit found.
The eurozone’s two largest economies reported better than expected improvements in sentiment. Germany’s composite PMI increased to 45.8 and France broke the 50 mark to reach 51.3.
The UK also reported a greater improvement in sentiment than analysts had expected. The IHS Markit/Cips interim UK PMI for services rose to 47 in June from 29 in May — well above the 40 expected by economists polled by Reuters. The PMI for manufacturing jumped to 50.1, from 40.7.
“While acknowledging the fact that sentiment has recovered remarkably quickly, we continue to stress that it’s difficult to fully convert these numbers into realised growth numbers,” said Marcus Widén, economist at SEB.
“The large rise in the French numbers should also be viewed in light of the previous large drop during the spring, [a] larger monthly drop equals a larger monthly gain,” he added.
On Tuesday Germany’s top economic advisers slashed their growth forecast, warning the economy would contract by 6.5 per cent this year and not return to its pre-pandemic level until 2022. The Council of Economic Experts said the country would experience its biggest postwar recession, but it would be a milder downturn than many other large European countries.
“During the financial crisis, it took until the first quarter of 2011 before the economic level from early 2008 was reached again,” the council said. “It is difficult to estimate when a full return to a new normality will take place.”
June’s flash PMI was based on data collected between June 12 and 22. Flash estimates are published one week before the final results and are based on about 85 per cent of the total final responses.