Fresh lockdown measures announced across Europe in recent days to mitigate the level of virus contagion have once again triggered a flurry of downgrades to economic growth forecasts.
Although activity has in recent months picked-up following a severe deterioration, created a sense of optimism for the single currency bloc, the resurgence of the COVID-19 pandemic is once more threatening the continent’s recovery, with a surprising Q4 slump possibly on the horizon.
The recovery, primarily driven by the manufacturing industry and initially aided by the expansion within the services sector, as economies continued to re-open after lockdowns implemented to curb the spread of COVID-19, although encouraging, was unbalanced.
On the back of fiscal measures, deployed by governments to trigger an economic recovery, manufacturing PMI figures, significantly improved, exceeding pre-coronavirus levels, heading to multi-year highs.
Notably, in October, the Eurozone manufacturing PMI rose to 54.8, from 53.7 in the previous month and beating market expectations of 54.4. The latest reading pointed to the steepest month of expansion in the manufacturing sector since July 2018.
Contrasting the manufacturing PMI data – showing continued expansion and proving to be more resilient, as supply chains remained practically unscathed while exports showed signs of a recovery, are the most recent services PMI figures.
With services ultimately bearing the brunt of a rapid increase in the infection rate and movement restrictions, to safeguard citizens from a health front, the Eurozone services PMI, albeit beating expectations of 46.2, remained into contraction territory for the second consecutive month at 46.9, and lower than September’s 48.
October’s reading for the Euro area – the lowest recorded by the survey since May, proved to be the third successive monthly decline in levels of incoming new business, with both internal and external demand witnessing declines. Although the rate of contraction was modest, unemployment figures within the services sector were cut for the eighth successive month.
France’s services PMI, one of Europe’s worst hit by the pandemic’s second wave, fell to 46.5 in October from 47.5 in the previous month, matching a preliminary estimate. The latest reading pointed to the steepest contraction since May and the second consecutive in the services sector.
Similarly, for the third consecutive month, Italy’s services sector witnessed a contraction, with the PMI figure edging lower to 46.7, from 48.8 in the previous month.
Although upwardly revised to 49.5 from a preliminary 48.9, Germany - Europe’s largest economy, for the first time in four months, reported a contraction, as rising number of Covid-19 cases weighed on demand and led to a new wave of Covid-19 restrictions.
In October, the Eurozone composite PMI – combining both manufacturing and services, edged lower to 50, from 50.4 in the previous month, with the improvements witnessed in the manufacturing sector proving insufficient to compensate for the drop within the services sector.
The said PMI figures do portray a skewed impact on the Euro area economy. A two-speed economy is now, more than ever, deepening. Manufacturing, buoyed by increased demand, is as yet witnessing growth, while services, the majority of which are reliant on human interaction, are once again facing the unavoidable consequences of a rapid increase in COVID-19 infections and lockdown measures.
Even though, as yet, the restrictions imposed are less strict, when compared to those introduced earlier this year, a continued downturn within the Eurozone, mainly due to the expect fallout in the services sector, is expected, deepening the economic scars.
Indeed, a sustained downturn in services does not augur well for the bloc’s near-term outlook. That said, if the extended stimulus argument is still constructive, markets should continue to be positively accustomed. We continue to believe that that both fiscal and monetary stimulus are imperative, with the latter pointing to a December action.
Disclaimer: This article was written by Christopher Cutajar, credit analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.
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