Eurozone economic recovery falters

A farmer loads cattle onto a boat for the transport on their return from the mountain pastures during the so-called ‘Almabtrieb’ (cattle drive) near the village of Schoenau on Lake Koenigssee in the German Alps, southern Germany. The eurozone’s economic recovery faltered in September.– AFP

LONDON: The eurozone’s economic recovery faltered in September as the reimposition of some restrictions on activity to halt a resurgence in the coronavirus sent the bloc’s dominant service sector into reverse, a survey showed. Rising infection rates in the region, something a Reuters poll said last month was the biggest threat to the recovery, will concern policymakers who had hoped the bloc’s economy was healing after contracting an historic 11.8 percent in the second quarter.

To support the economy, the European Central Bank plans to make 1.35 trillion euros of pandemic-related additional asset purchases and the European Union has announced a 750 billion euro recovery fund due to kick in next year. But that didn’t stop IHS Markit’s final composite Purchasing Managers’ Index, seen as a good barometer of economic health, falling to 50.4 in September from August’s 51.9, close to the 50 mark separating growth from contraction.

It was dragged down by the PMI for services industries, which accounts for around two thirds of GDP, which slumped to 48.0 from August’s 50.5, albeit slightly better than a preliminary 47.6 estimate. “With the euro zone economy having almost stalled in September, the chances of a renewed downturn in the fourth quarter have clearly risen,” said Chris Williamson, chief business economist at IHS Markit.

“Much will depend on whether second waves of virus infections can be controlled, and whether social distancing restrictions can therefore be loosened to allow service sector activity to pick up again.” Suggesting any pick up may take some time, demand for services fell in September and firms cut headcount for a seventh month. The new business index fell to 48.1 from 49.8.

Still, optimism about the coming year improved to levels not seen since before Europe felt the full brunt of the pandemic. The composite future output index rose to 60.5 from 57.8, its highest since February. Meanwhile, Germany’s service sector barely grew in September, but strong manufacturing helped the private sector in Europe’s largest economy to remain on track for a solid recovery in the third quarter, a survey showed yesterday. IHS Markit’s final services Purchasing Managers’ Index (PMI) fell to 50.6 from 52.5 in the previous month.

The reading, which came in higher than a flash reading of 49.1, marked the third month in a row that the services index was above the 50 mark dividing growth from contraction. The final composite PMI covering both the services and manufacturing sectors rose to 54.7 from 54.4 the previous month. That was higher than the flash figure of 53.7. IHS Markit economist Phil Smith said coronavirus infections in Germany had been rising to a smaller extent than in other European countries, so the impact on actual services activity had been smaller than in the likes of Spain and France.

“While the service sector is close to stalling, growth in Germany has been buoyed by a reviving manufacturing sector, which means the economy carries at least some momentum heading into the final quarter of the year,” Smith said. Germany is doing also better than most of its eurozone peers in terms of shielding the labour market from the brunt of the pandemic as there was some hiring across the service sector and a slowdown in factory job cuts, he added.

Chancellor Angela Merkel and Finance Minister Olaf Scholz have since March unleashed an unprecedented array of rescue and stimulus measures to help companies and consumers recover as quickly as possible from Germany’s deepest recession on record. The packages include unlimited liquidity aid for struggling companies, a massive job protection scheme to shield workers from sudden unemployment as well as cash handouts for parents and a temporary value added tax cut to boost domestic demand.

The German economy contracted by a record 9.7 percent in the second quarter as household spending, company investments and trade collapsed at the height of the pandemic. For the third quarter, the Ifo institute expects 6.6 percent output growth which is seen slowing to 2.8 percent in the fourth quarter. – Reuters

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