The downturn in the European blocking services sector is intensifying

The downturn in the European blocking services sector is intensifying

Service companies in Italy and Spain saw another decline in their activities last month as a widespread corporate survey showed restrictions on containing the second wave of coronavirus pandemic companies.

IHS Markit’s Flash Services Purchasing Managers’ Index has fallen in both countries, with companies seeing sharp falls in demand and activity due to the pandemic, data released Wednesday showed.

The Spanish index was slightly better than most economists expected, but fell 1 point in October to a five-month low of 41.4. Italy’s index fell below expectations to a four-month low of 46.7 after 48.8 in the previous month.

A reading below 50 indicates that the majority of companies reported a decrease in activity from the previous month. The service sector accounts for around three quarters of production and jobs in the euro area.

“Worryingly, today’s data confirmed the deteriorating short-term prospects for the bloc,” said Maddalena Martini, an economist with Oxford Economics. “The deterioration in health and the reintroduction of restrictions will continue to affect the service sector.”

The results contrasted with other PMI data this week, which showed activity in European manufacturing continued to grow. This is proving to be more resilient as supply chains have remained relatively intact and exports are picking up again.

Many service companies, such as airlines, hotels, retailers and hairdressers, rely on human contact and are therefore hardest hit by the restrictions on social interaction and movement of people introduced to contain the spread of the coronavirus.

In the past few days, restaurants, bars, gyms, cinemas and theaters have been forced to close, and curfews have been imposed across much of Europe while some countries such as France, Ireland and Belgium have had to close non-essential businesses.

Although the new restrictions are less stringent than those put in place in the spring, they are expected to cause a further downturn in the eurozone economy, which remains well below pre-pandemic levels despite a strong recovery in the third quarter.

IHS Markit has also slightly revised its service indices for Germany, France and the Eurozone compared to the first flash metrics published two weeks ago. Despite the revisions, the euro area services PMI still fell to 46.9 in October from 48 in the previous month.

The euro area composite PMI, which includes both services and manufacturing, was revised from 49.4 to 50 but remained lower from 50.4 in the previous month.

“Only in Germany has the strength of the manufacturing sector counteracted the renewed decline in activity in the service sector, which has led to increasingly polarized economic development in the member states of the euro area,” said Chris Williamson, chief economist at IHS Markit. “For all countries, however, the outlook has grown increasingly dark.”

Contrary to dismal European data, IHS Markit reported on Wednesday that service activity in China, India and Australia rose sharply. This underscores how much Asia has recovered from the pandemic much faster than Europe.

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As the virus erodes consumer confidence and severely impacts tourism, Spanish service companies reported the fastest declines in activity and new business since May, depressing profit margins and causing them to shed more jobs.

“Unsurprisingly, the impact is greatest in hotels and restaurants, where Covid-19 restrictions and a lack of domestic and international demand are having a severe and negative impact on activity,” said Paul Smith, commercial director at IHS Markit.

It was an equally bleak picture in Italy, where service companies reported that new business had declined in negative territory for eight consecutive months at the fastest pace since June – hit by a decline in foreign demand. They have shed jobs at the highest rate since July.