European business activity crashes under coronavirus lockdown
The coronavirus lockdown is doing “unprecedented damage” to European business activity as companies across the services and manufacturing sectors report a record deterioration and warn of a substantial fall in employment, according to data published on Thursday.
The IHS Markit flash eurozone purchasing managers’ index for services crashed from 26.4 in March to 11.7 in April, the lowest since records began in 1998. The index indicates how activity has changed compared with the previous month; a reading below 50 indicates that a majority of businesses reported a deterioration.
“April saw unprecedented damage to the eurozone economy amid virus lockdown measures coupled with slumping global demand and shortages of both staff and inputs,” said Chris Williamson, chief business economist at IHS Markit.
“The ferocity of the slump has also surpassed that thought imaginable by most economists, the headline index falling far below consensus estimates.”
Business activity has reached record lows in France and Germany, the eurozone’s largest economies, according to separate data from IHS Markit also published on Thursday.
The flash estimates are published one week before the final survey results and are based on about 85 per cent of the typical responses.
There was an equally grim picture in the UK, where manufacturing and services activity contracted at a rate “vastly exceeding that seen even during the global financial crisis”, said IHS Markit.
Many of the eurozone companies surveyed predicted heavy job losses ahead. IHS Markit said: “In some cases, the employment decline reflected furloughed workers, but even if these workers are excluded the fall in employment was still among the steepest ever recorded by the survey.”
Frederik Ducrozet, strategist at Pictet Wealth Management, said the outlook for employment was “by far the worst news in [the] euro area PMIs”.
The eurozone’s services industry had already reported a sharp deterioration in activity in March, and in Thursday’s figures that reflect April’s economic conditions the manufacturing sector caught up. Its output index dropped to a record low of 18.4, down from 38.5 in the previous month.
The composite index, an average of manufacturing and services, fell to 13.5 in April, from 29.7 the previous month, also a record low in the 22 years of the survey. By comparison, the lowest reading seen during the global financial crisis was 36.2 in February 2009.
Economists warned that the readings were consistent with the fiercest downturn the region had experienced in recent history.
Carsten Brzeski, economist at ING, said the data were “dreadful — this is what a lockdown looks like”.
The IMF said recently that it expected the eurozone economy to suffer a record postwar contraction of 7.5 per cent this year, before rebounding with growth of 4.7 per cent next year.
IHS Markit said its PMI results indicated the eurozone economy would contract by 7.5 per cent in the second quarter.
Morgan Stanley analysts said they expected “much sharper declines” than that. They added, however, that governments’ moves to partially lift lockdowns would “put significant upward pressure on the PMIs next month, although activity levels will likely remain depressed for some time”.
Most of the eurozone has been in lockdown since the second week of March, but some countries, including Germany and Austria, have partially relaxed the restrictions by allowing some shops and restaurants to reopen.
Katharina Utermöhl, economist at Allianz, predicted that people would respond to the crisis by saving more rather than spending more, even as the lockdowns start to be lifted.
“We think we will see €1.3tn of additional saving in the EU — a 20 percentage point increase in the household savings rate in the second quarter alone — which is the effect of people not being able to spend and also being more cautious when the lockdown is lifted,” she said.
The gloomy news was compounded on Thursday by the release of separate French business survey data showing that confidence and production capacity have plummeted to their lowest levels on record.
The French business climate index lost more than 30 points in April, falling to 62, the lowest since the series started in 1998, according to France’s office for national statistics. The index’s longtime average is 100.
With many factories temporarily shut, France’s production capacity has fallen from 83 per cent in March to a record low of 67 per cent in April, the statistics office said.
Meanwhile, half of all German companies polled by the Ifo Institute in Munich said they were relying on the government-subsidised short-time work scheme to avoid laying off workers as the pandemic cripples production and sales.
About 84 per cent of companies reported a decline in sales due to coronavirus, according to the Ifo survey published on Thursday, and less than half of them believe that they can partially make up for the decline in the future. Some 41 per cent of companies reported supply problems for key intermediate products.