Line chart of Purchasing managers

Eurozone business activity rebounds from pandemic hit

Europe’s economic recovery from the coronavirus pandemic is gathering pace, according to a widely watched set of business surveys that found significant improvements in activity in both the services and manufacturing sectors.

Services sector businesses across the eurozone reported a substantial strengthening in July, according to the IHS Markit flash purchasing managers’ index that rose to 55.1, from 48.3 in June. The result exceeded the expectations of economists polled by Reuters, who had forecast a reading of 51.

A reading above 50 indicates a majority of businesses reported an expansion in activity compared with the previous month.

The index for manufacturing rose from 47.4 in June to 51.1 in July, and the composite PMI, an average of the two sectors, improved from 48.5 in the previous month to 54.8, above the 51.1 forecast by analysts.

“Companies across the euro area reported an encouraging start to the third quarter, with output growing at the fastest rate for just over two years in July as lockdowns continued to ease and economies reopened,” said Chris Williamson, chief business economist at IHS Markit. “Demand also showed signs of reviving, helping curb the pace of job losses.”

But the sentiment surveys are not a measure of the extent to which economic activity has recovered relative to the pre-virus level and, while they signal how broad-based the recovery is, they cannot measure its pace.

Jack Allen-Reynolds, senior Europe economist at Capital Economics, said the figures were “clearly good news” and “the recovery seems to be broad-based”.

In Germany, the flash manufacturing survey rose from 45.2 in May to 50 in July, beating consensus expectations by 2 points — its first move out of contraction territory since the end of 2018.

Bert Colijn, senior economist at the bank ING, said: “The significant improvement indicates that demand is bouncing back as economies reopen, which confirms our view of a very strong third-quarter growth figure.”

Germany’s services PMI rose from 47.3 in June to 56.7 in July, well above the 50.5 expected by economists polled by Reuters, and its composite PMI improved from 47 in the previous month to 55.5.

The French services PMI rose from 50.7 in June to 57.8 in July, the fastest acceleration in two-and-a-half years. Economists polled by Reuters had expected an improvement to 52.3.

France’s composite PMI, an average of the two sectors, improved by 5.9 points to 57.6 in July, a 30-month high, beating analysts’ expectations of a rise to 53.5.

Services activity also climbed in the UK, hitting a five-year high. The IHS Markit/Cips flash services PMI rose to 56.6 from 47.1 the previous month. The UK manufacturing PMI reached a two-and-a-half year high of 57.1, from 50.1 in June, bringing the composite index to 57.1, up from 47.7.

However, there were some weaker areas in the European data.

Germany’s labour market continued to be gloomy, with employment data reporting a fifth monthly decline. Nearly a third of German goods producers reported a drop in staff numbers. 

And business executives in the French manufacturing sector recorded a slight reduction in activity. France’s PMI manufacturing index dipped from 52.3 in June to 52 in July.

“The big picture for the eurozone remains of an economy still suffering the economic consequences of the coronavirus outbreak and the lockdowns,” said Maddalena Martini of Oxford Economics. The eurozone is likely to experience a gradual rebound in activity in the second half of the year, she added.