Euro Area: Manufacturing activity expands at fastest pace in over two years in July on easing lockdowns

Euro Area PMI July 2020

Euro Area: Manufacturing activity expands at fastest pace in over two years in July on easing lockdowns

The flash Eurozone Composite Purchasing Managers’ Index (PMI), produced by IHS Markit, moved into expansionary territory in July fueled by a further easing of lockdown measures. The index rose to 54.8 in July from June’s 48.5, marking the strongest reading since June 2018. Therefore, the PMI moved above the 50-threshold that distinguishes expanding from contracting business activity in the Eurozone.

The services sector recorded the most pronounced improvement in the month, while manufacturing activity recovered ground to a somewhat more limited extent. Output and new orders returned to growth, in both the manufacturing and the services sectors. That said, employment in both sectors continued to decline, although the pace of job shedding moderated from June. Meanwhile, business sentiment also strengthened, reflecting expectations of a further opening of the economies. On the price front, output prices continued to fall, albeit at a less pronounced pace, as firms offered discounts, while input prices rose again due to widely-reported Covid-19 protection costs.

Assessing the Eurozone’s two largest economies, France again led the improvement as output in both the manufacturing and the services sectors grew at the fastest pace in two-and-a-half years; similarly, Germany’s composite PMI moved to expansionary terrain, while the rest of the region also saw output return to growth.

Commenting on the release, Chris Williamson, chief business economist at IHS Markit said:

“The concern is that the recovery could falter after this initial revival. Firms continue to reduce headcounts to a worrying degree, with many worried that underlying demand is insufficient to sustain the recent improvement in output. Demand needs to continue to recover in coming months, but the fear is that increased unemployment and damaged balance sheets, plus the need for ongoing social distancing, are likely to hamper the recovery.”

Meanwhile, Bert Colijn, Senior Eurozone economist at ING, stated:

“A v-shaped recovery seems quite unrealistic, despite the encouraging numbers. Rising unemployment is one factor that hampers a recovery, but so is the possibility of a second Covid-19 wave. With new cases on the rise again, this scenario is a significant downside risk, making the outlook for the months ahead very uncertain.”

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