The Eurozone economy is slowing again

Manufacturing Improves in Europe, but Services Turn Lower Again

Posted Wednesday, September 23, 2020 by
Skerdian Meta • 3 min read

The Eurozone economy started recovering well in the first two months of reopening after the lock-downs, with manufacturing activity and services increasing. But the recovery started to show signs of weakness in July and the recent data from Europe is showing further weakness. The manufacturing sector is picking up pace slowly, but services which were surging at first, turned lower this month, as the flash reports from the Eurozone showed. Now the service sector has dipped in contraction again, both in Germany and France.

French Services and Manufacturing Report – 23 September 2020

  • September flash services PMI 47.5 points vs 51.5 expected
  • August services PMI was 51.5 points
  • Manufacturing PMI 50.9 points vs 50.6 expected
  • August manufacturing PMI was 49.8 points
  • Composite PMI 48.5 points vs 51.9 expected
  • Composite PMI Prior 51.6 points

French business activity unexpectedly slows as the surge in virus cases puts a damper on the recovery, with the services sector bearing the brunt of the health crisis. This reaffirms the narrative that the recovery at the start of Q3 is reaching a ceiling and that things may not be as rosy as anticipated towards the latter stages of the year.

German Services and Manufacturing Report – 23 September 2020

  • September flash manufacturing PMI 56.6 poionts vs 52.5 expected
  • August manufacturing PMI 52.2 points
  • Services PMI 49.1 points vs 53.0 expected
  • August services PMI was 52.5 points
  • Composite PMI 53.7 points vs 54.0 expected
  • August composite PMI was 54.4

The report here offers a bit of a mixed bag, as German manufacturers are seen benefiting from some return in foreign demand but the recovery in services is losing steam as virus fears start to return and weigh on domestic consumption. I guess the bright spot is that the German economy relies more heavily on the manufacturing side but if the virus situation does worsen and prompts tighter restrictions, that in itself will also weigh on production and output in the bigger picture.

Markit notes:

“While latest PMI data shows German economic output continuing to rise in September, it highlights a growing divergence in trends between manufacturing and services.

“With services business activity falling for the first time in three months, the recovery in the tertiary sector has possibly reached a ceiling thanks to ongoing social restrictions and still-high levels of uncertainty in the economy, including around job security. In contrast, manufacturing is still rebounding strongly thanks to in part to improving export demand, with sharply rising levels of output and new orders helping to slow the rate of job losses in the sector.

“Rising numbers of coronavirus cases have coincided with a drop in confidence among service providers, while manufacturers appear to be shaking off any worries about the potential for further restrictions domestically or abroad, with confidence among goods producers improving to the highest for more than two-and-half years.”

Eurozone Services and Manufacturing Report – 23 September 2020

  • September flash services PMI 47.6 points vs 50.6 expected
  • August flash services PMI 50.5 points
  • Manufacturing PMI 53.7 points vs 51.9 expected
  • August manufacturing PMI  was 51.7
  • Composite PMI 50.1 points vs 51.9 expected
  • August composite PMI was 51.9 points

Business activity in the euro area pretty much grinds to a halt in September, with the services sector being the main drag as seen earlier from the French and German readings – owing to the resurgence in virus cases across the region. The bright spot is that the manufacturing sector remains unperturbed by the situation as a pickup in foreign demand is helping to bolster new orders and output. When put together, the pace of the recovery has certainly stalled somewhat towards the end of Q3 and this certainly doesn’t bode too well for the outlook going into Q4.

Markit notes:

“The eurozone’s economic recovery stalled in September, as rising COVID-19 infections led to a renewed downturn of service sector activity across the region.

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 face-to-face consumer businesses in particular have been hit by intensifying virus concerns.

“Job losses also picked up in the service sector as more companies became worried about costs and overheads. Fortunately, factories saw slower staff shedding as pressure on capacity begins to emerge, suggesting the overall rate of job cutting has peaked.

“Encouragement comes from a further improvement in companies’ expectations for the year ahead, but this optimism often rests on infection rates falling, which remains far from guaranteed for the coming months. The main concern at present is therefore whether the weakness of the September data will intensify into the fourth quarter, and result in a slide back into recession after a frustratingly brief rebound in the third quarter.”


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