Euro zone recovery stutters in September as coronavirus infections rise

A queue for Covid-19 tests outside a Laboratory in Paris on September 22, 2020 in Paris, France.

Kiran Ridley | Getty Images News | Getty Images

Euro zone business activity has taken a hit in the month of September as countries face a second wave of coronavirus infections, initial data showed Wednesday.

The flash euro zone PMI (purchasing managers’ index) composite index — which measures both manufacturing and services — stood at 50.1, just marginally pushing into expansion territory. A reading below 50 indicates an economic contraction. This latest preliminary number points to a three-month low in economic activity for the region. 

The services sector is in a particularly dire state, the data showed, with activity contracting this month to a four-month low. Manufacturing in the euro zone remained in positive territory and hit a 31-month high.

“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,” Chris Williamson, chief business economist at IHS Markit, said in a statement alongside the data.

The European Centre for Disease Prevention and Control said that as of Sep. 22, there had been 2.9 million confirmed infections in the region, with Spain and France now seeing daily cases rise above the 10,000 mark. Governments have announced new restrictions to prevent the spread of the virus and economists have started considering the economic ramifications of the new measures.

Speaking to CNBC on Wednesday, Williamson said upcoming data is likely to show a further slowdown in overall activity, which poses a “big risk of a double dip” in the euro area. 

France in recession territory

A sharp fall in activity in the French services industry was not fully offset by manufacturing output. This led the overall index for France to drop for the first time in four months, IHS Markit reported, dropping to 48.5 in September from 51.6 in August.

In Germany, the pace of the economic rebound slowed but was somewhat offset by its manufacturing industry. The overall flash German PMI came in at 53.7, from 54.4 in August. “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,” Williamson said.

The latest data has led to a cautious tone from economists on how the euro zone economy will perform in the coming quarters.

“The further decline in the euro-zone Composite PMI in September adds to the evidence that the initial rebound in activity has already run out of steam,” analysts at Capital Economics said in a research note after the data.

They added that with new lockdown restrictions, there is a “risk is that the economic recovery goes into reverse.”

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