Eurozone industry at 18-month high but job cuts weigh on recovery

Author: Morgan Condon


LONDON (ICIS)--Eurozone manufacturing recorded growth in July, breaking the 18-month trend of contractions, according to the latest data from IHS Markit Economics on Monday.

Job cuts continued in July, however, which could pose a risk to the medium-and long-term economic recovery.

The manufacturing purchasing managers’ index (PMI) rose to 51.8 for the month, comfortably above the 50.0 neutral mark and up from 51.1 in the flash estimate and from 47.4 in June, accounting for seasonable variables.

This rise was driven by increased demand and output as coronavirus restrictions continued to ease throughout Europe, supporting higher levels of new orders and stronger production levels.

Growth was recorded in all market groups, with consumer goods marking the most significant uptick, and was almost unanimously throughout the 19-country single-currency bloc, with only the Netherlands and Greece recording declines.

Spain had the best-performing month for manufacturing, with a more than two-year high at 53.5, followed by a 19-month high in Austria at 52.8 and a 22-month high in France at 52.4.

More modest increases were made in Italy – reaching a 25- month high at 51.9 – and Germany, with a 19-month high at 51.0, up from 50.0 in the flash data.

The data pointed to an increase in both domestic and international markets, with an increase in export levels for the first time since September 2018.

Business confidence for the next 12 months continued to rise on the previous month’s levels to its highest level since January, which could pave the way to a steady economic recovery, which was supported by analysis from Oxford Economics.

“We expect the industrial recovery to be only gradual, as the disrupted supply chains get back up and running, and demand and capacity utilization slowly return to the pre-pandemic levels,” said Oxford Economics.

“We expect eurozone industrial production to return to end of 2019 levels only by the end of next year.”

Despite the signifiers of a revival, some data demonstrated that manufacturing in the eurozone has not returned to normal.

Backlogs of work continued to trend down, and producers continued to work through built-up supplies instead of replenishing inventories, and prices dwindled for the fourteenth consecutive month.

The biggest detractor remains employment, as job cuts have continued, which could hamper any pickup in economic activity.

“The job numbers remain a major concern, however, especially as the labour market is likely to be key to determining the economy’s recovery path,” said IHS Markit’s chief business economist Chris Williamson.

“Although the rate of job losses eased to the lowest since March, it remained greater than at any time since 2009, reflecting widespread cost-cutting in many firms where profits have been hit hard by the virus outbreak.”

As infection rates have started rising in some areas of Europe, this could reverse any pickup in manufacturing, as regulators impose lockdown restrictions to cap infection rates.

These factors caused Dutch-headquartered financial services company ING to downgrade its forecast for the Spanish economy to contract by 13% for 2020, from the previous 11% drop anticipated (also accounting for the 18.5% GDP drop in the second quarter, data published last week).

“If the situation deteriorates further and new lockdown measures are needed to combat the pandemic, then a contracting manufacturing sector is again a possibility, not to mention the more important services sector, with further downgrades of our growth forecast,” said ING economist for Spain and Portugal Steven Trypsteen.

As the global economy has been bludgeoned by the pandemic, it has affected the collection of PMI data, according analysts at Oxford Economics, which could change how the information is interpreted.

“We recall that it has been difficult to interpret the PMI figures during the current economic crisis as their standard definition – a month-on-month change across firms’ activities – is no longer realistically reflected in the survey respondents’ answers," the analysts said.

"Instead, we are interpreting PMI data more as an indication of broader trends in economic activity."

Front page picture: A woman wearing a face mask in Barcelona; rising infection rates in Spain could derail the country's recovery, according to analysts
Source: Matthias Oesterle/ZUMA Wire/Shutterstock

Focus article by Morgan Condon