Eurozone business activity back in expansion mode as lockdowns ease

Business activity in the eurozone returned to growth in July as governments eased lockdown restrictions, according to preliminary figures released on Friday.

IHS Markit’s flash composite eurozone purchasing mangers’ index - which measures activity in both the services and manufacturing sectors - rose to 54.8 in July from 48.5 in June, hitting a 25-month high and coming in above the 50.0 mark that separates contraction from expansion. It was also comfortably above expectations for a reading of 51.1.

It was a big improvement on the all-time low of 13.6 seen in April and the first reading above 50.0 since February.

The flash manufacturing PMI also moved back into expansion territory, rising to a 19-month high of 51.1 from 47.4 in June. Analysts had expected a reading of 50.0.

The services PMI, meanwhile, printed at 55.1 in July compared to 48.3 the month before. This was a 25-month high and better than expectations of 51.0.

Chris Williamson, chief business economist at IHS Markit, said: "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. Demand also showed signs of reviving, helping curb the pace of job losses.

"The data add to signs that the economy should see a strong rebound after the unprecedented collapse in the second quarter. However, while the survey’s output measures hint at an initial v-shaped recovery, other indicators such as backlogs of work and employment warn of downside risks to the outlook."

Williamson said the concern is that the recovery could falter after this initial revival, with firms continuing to reduce headcounts "to a worrying degree" amid fears that underlying demand is insufficient to sustain the recent improvement in output.

ING economist Bert Colijn said the significant improvement in the composite PMI indicates that demand is bouncing back as economies reopen, which confirms ING’s view of a very strong 3Q growth figure.

"Also important is the speed of the recovery of German exporters which showed some signs of life as demand from China has been picking up in July, but also internal eurozone demand too.

"For the eurozone’s strongest exporter, this is positive news and it is an early indication that trade might have also started a cautious recovery.

"Even though output is recovering, businesses are still reducing jobs at a considerable pace. This is in line with our expectations as short-time work schemes have kept unemployment artificially low throughout the lockdown and we expect unemployment to continue to rise for quite some time.

"This will be a key factor hampering the recovery after the first phase of rapid growth post-lockdown is over."