Leading indicators point to a “risk of double recession” in the Old Continent, although the relapse would be less than in spring
The second wave of COVID-19 infections and the return of mobility restrictions in various parts of Europe – although much less severe than in spring – are already leaving their mark on the economy and, particularly, on the services sector. In October, the composite PMI for the euro area – one of the indicators that investors look at most closely to try to glimpse the economic patterns of the near future – entered a contraction zone, going from 50.4 to 49.4 points, its minimum in four months, according to the figures published this Friday by the consultancy IHS Markit.
Activity in the tertiary sector, the one most exposed to physical contact – and therefore the most affected by the new restrictions – fell to a minimum of five months (46.2 points compared to 48 in September, when it returned to negative ).
Manufacturing, on the other hand, maintains the resistance pattern they have exhibited since the beginning of the pandemic, even managing to improve the September mark: 54.4 points, compared to 53.7 the previous month. It is its best reading in more than two years and confirms that the economies most dependent on the industry are weathering the storm much better than those that, like Spain and the rest of the Mediterranean arc, rely on tourism and services, activities by definition most affected by the pandemic. That gap clearly marks a two-speed recovery: Germany and the eastern countries are coming off much better than their southern peers.
The divergence, as IHS Markit chief economist Chris Williamson has warned, “is even more pronounced between countries” than between sectors: while the German economy is being driven by the strength of the manufacturing sector, “the rest of the region has been plunged into a growing slowdown ”. Despite falling slightly due to the downward pressure on services, the IHS Markit composite indicator for Germany fell just two tenths (from 54.7 in September to 54.5 in October) and remained clearly in positive territory thanks to the secondary sector resistance.
The weakening of private sector activity in the euro zone caused further job cuts in the bloc, thus extending the workforce adjustment to eight consecutive months, although the rate of job loss continued to moderate compared to the record level registered last year month of April. “The Eurozone faces a greater risk of falling into a double recession, as a second wave of virus infections caused a renewed decline in activity in October,” concludes Williamson.
All in all, the blow would be notably less than that suffered in the second quarter of the year. The new recession in the euro area, if it occurs, would be “modest, much milder than the one observed during the second quarter”, but the prospect of a relapse will put more pressure on the European Central Bank (ECB) “to inject more stimulus and for national governments to help cushion the impact of the covid-19 containment measures “. Bloomberg’s panel of experts also points in the same direction: the Eurobanco, they say, would be preparing a new round of stimulus to contain the risks of the braking in the final stretch of the year.