Eurozone collapse eases as lockdowns lift

Author: Tom Brown

2020/05/21

LONDON (ICIS)--The unprecedented collapse in eurozone private sector growth seen in April as a result of the shutdown of non-essential business across most of the bloc eased slightly in May, but still remained deep in contraction territory, according to analyst data.

The composite eurozone purchasing managers’ index (PMI), covering manufacturing and service sector output growth – rebounded from the record low of 13.6 recording in April, to 30.5, as governments moved to gradually ease controls on populations and allow more of the economy to reopen.

A PMI level of below 50.0 indicates contraction, and under more normal economic circumstances a PMI reading of below 45 would represent a dramatic contraction for a eurozone country.

The IHS Markit metric covers two manufacturing indices: manufacturing PMI, measuring new orders, output, employment, delivery times and stocks, and the manufacturing output index, built around the question of whether output for a producer is higher or lower than the previous month.

Manufacturing PMI rebounded to 39.5 from 33.4 the previous month, while a month on month increase in productivity drove a sharper rally for the manufacturing output index, which jumped to 35.4 from 18.1 in April.

The improvement in service sector growth was more modest, with non-essential retail still closed in some countries and the issue of how to safely reopen restaurants and bars remaining a a hurdle. The index for the space rose to 28.7 in May from 12 in April.

Pricing for goods and services fell sharply for the third consecutive month, according to Markit, as firms sought to stimulate business with substantial discounts, although the drop was counterbalanced to an extent by lower costs.

Redundancies continued at a rate unseen in modern times before the onset of the pandemic, while expectations for output over the next 12 months continued to improve from the all-time low seen in March, although the number of pessimists responding to the survey still outweighed optimists.

Rates of  decline eased across the eurozone, with Germany seeing a milder downturn than France but the rest of the bloc even harder hit.

The readings indicated that the economy may have bottomed out in April, according to Chris Williamson, chief business economist at Markit, although current indicators point to a GDP contraction of 10%.

“The rise in the PMI adds to expectations that the downturn should continue to moderate as lockdown restrictions are further lifted heading into the summer,” he said.

Markets have rallied through much of the month on hopes that Europe may be on a recovery trajectory, with the chemicals sector buoyed further by recovering oil prices as OPEC+ production cuts coincide with the rollback of lockdown restrictions.

The current pace of recovery could come to a halt if increases in the reproduction or ‘R’  rate of the virus prompt a return to more stringent lockdown measures.

Lebanon was forced back into lockdown last week, while a fresh spate of cases from a nightclub in South Korea indicated the difficulty of reopening even in countries that saw few coronavirus deaths.

In the absence of a second wave of infections, the question remains whether how fast the recovery will take.

The improved numbers are a welcome sign of tentative green shoots, according to analysis by Oxford Economics, but the way the PMI index functions, as a survey of whether conditions have improved for individual firms month on month, indicates that conditions may still have worsened in May for many despite hope for improvements ahead.

“The index remains deep in contractionary territory and below the bottom reached during the financial crisis. At face value, the PMI suggests a further worsening in activity in May, as the index measures if conditions have improved or not relative to the previous month,” said Oxford European economist Rosie Colthorpe.

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