The outbreaks call into question the recovery of the eurozone

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Services enter the contraction zone and push down the PMI of the euro countries. Only the industry holds the type and gives a powerful oxygen balloon to Germany

The recent worsening of the health situation in several European countries is beginning to affect leading indicators, which point to a significant slowdown in the pace of economic recovery. The composite purchasing managers index (known under the acronym PMI) of the euro zone, one of the figures that economists observe with special intensity to try to guess what will happen in the nearest future, stands in September at 50.1 points, only one tenth above the point that marks the boundary between expansion and contraction and far from the 51.9 points of the previous month. With a week to go to the end of the month, the figure released by the IHS Markit consultancy points to the worst reading since early summer.

“The economic recovery of the euro zone stalled in September, as the increase in covid-19 infections led to a renewed reduction in the activity of the services sector throughout the region,” notes the head of analysis at IHS, Chris Williamson, in the note accompanying the results. After a spring marked by fire by confinements and a summer of incipient green shoots, autumn and winter will be difficult.

As usual since the beginning of the pandemic, the blow was especially severe in the services sector: in it, activity fell in September to its lowest level in four months and clearly entered the contraction zone: 47.6 points compared to August 50.5. Although the reading was already weak then, in the middle of the holidays Europeans still expected a return to activity faster than what is being demonstrated. In the same vein, the prices of products and services fell at their highest rate since June, thus accumulating seven months of decreases in this survey. This decline contrasts with what happened on the cost side, which rebounded for the fourth consecutive month. Something seems clear: in the face of a potential wave of new restrictions in the main European capitals, as is already happening in Madrid, services – and, especially, those that require direct contact with customers, such as bars and restaurants – will once again be worst part.

On the other hand, the best data comes from industry: manufacturing, highly dependent on foreign appetite, reached highs of two and a half years -since a distant February 2018-, even managing to surpass the previous month’s measurement: 55.6 to 56.8 points. This reading points to a recovery with more vigor in Europe whose economy more rests in the secondary sector (Germany and eastern countries) and lethargic in the countries of the Mediterranean arc, much more dependent on the tertiary sector. It is, as the London-based consultancy underlines, a return to life of the economy “at two speeds.”

The outbreaks, equally uneven and especially persistent in two southern countries of the Union, Spain and France, threaten to exacerbate this trend. “Outside of German industry, the recovery is coming to a halt,” said Jessica Hinds, from the analyst firm Capital Economics, in statements to Reuters. And with no signs that the resurgence of coronavirus cases has been eradicated, there is a clear and growing risk of reversal, at least in the hardest hit countries. [por la pandemia]”. “The data is not good for anyone, with the fall seen in the services sector, but relatively better for Germany due to the large rise in manufacturing and taking into account the greater relative weight of these in its economy”, adds Ángel Talavera, Chief Economist for Europe at Oxford Economics, in conversation with this newspaper. “It fell less and now it seems that something better is recovering, within what seems to be a final stretch of the year that does not look much less good.”

The dynamics are similar in the labor market. “Job losses also accelerated in the service sector as more companies exercised cost caution. Fortunately, the industrial sector has seen less destruction as the pressure on capacity begins to emerge, and this suggests that the rate of reduction of workforce, in general, has already peaked, ”says Williamson, from IHS Markit. Orders received by the industry are a key factor for this reading, slightly more positive than expected: pending orders contracted at a slower pace in September. It is one of the very few positive notes left by the last reading of the Eurozone PMI. Recovery, in short, is in question.

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