Europe Faces Recession Risk as Covid-19 Infections Stay High

Europe Faces Recession Risk as Covid-19 Infections Stay High

Where the pandemic has been contained in parts of Asia, the economic recovery continues

The eurozone economy likely contracted in the final three months of last year, according to surveys of purchasing managers, as rising coronavirus cases and government restrictions weighed on activity in the dominant services sector.

With infection rates still high, there appears to be little prospect of a strong rebound in the early months of this year, and a risk that the currency area will fall back into recession.

But where new infections are relatively contained, the economic recovery continues. Similar surveys of Chinese and Australian service providers recorded a strong expansion of activity in December.

A survey of U.S. service providers to be released later on Wednesday is expected to point to steady and strong growth.

Data firm IHS Markit Wednesday said its purchasing managers index for the eurozone’s services sector rose to 46.4 in December from 41.7 in November. A reading below 50.0 points to a decline in activity, while a level above that threshold points to an increase.

By contrast, the eurozone’s manufacturing sector recorded a faster rise in output as the year drew to a close. But services account for more than 70% of overall activity, and the December decline was large enough to cause a second straight month of contraction in the economy as a whole.

The European Central Bank estimates that the eurozone economy shrank by 2.2% in the final quarter of 2020. High levels of new infections, coupled with restrictions on restaurants and other services that involve close physical proximity, mean that a further decline in output is possible in the first quarter of this year.

“Worse may be yet to come before things get better,” said Chris Williamson, IHS Markit’s chief business economist. “Service sector activity looks likely to remain constrained by severe social distancing in the early months of the new year.”

However, the sharpest rise in new infections in Europe is taking place outside the eurozone.

The U.K. government on Monday announced a strict new lockdown in response to a surge caused by a new variant of the coronavirus. The restrictions require the effective closure of the U.K.’s hospitality and live entertainment industries, and in England will be lifted in mid-February at the earliest.

That is likely to lead to a larger contraction in the services sector than was recorded in December, with an increased risk that the U.K. will slip back into recession, defined as two straight quarters of falling output. Economists at JP Morgan said they now expect the U.K. economy to contract by 2.5% in the three months through March, having previously forecast a very slight expansion.

“The services sector is in a dark place with more hardships expected in the first quarter,” said Duncan Brock, group director at the U.K.’s Chartered Institute of Procurement & Supply, which helps compile the survey for that country.

Germany’s government on Tuesday extended a lockdown that was due to lift Sunday to the end of this month in response to a smaller rise in new infections. New cases have fallen in some other parts of Europe, but governments are wary of lifting restrictions until more is known about the new variant.

Additional restrictions that are likely to weaken services activity aren’t confined to Europe. In Japan, rising new infections led to a continued contraction in activity in the sector as 2020 drew to a close, and the early part of this year is unlikely to see a rebound. The government plans to announce a fresh state of emergency in Tokyo and three neighboring prefectures on Thursday.

Where new infections have been contained and restrictions eased, the services sector has quickly rebounded. That is the case in Australia, where the services PMI rose to 57.0 from 55.1, and in China, where growth eased slightly in December on weaker foreign demand. India also saw a continued rise in activity, albeit at a slower pace.