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Euro area PMIs mixed amid increased uncertainty

ToM24.09

The Covid-19 pandemic has dramatically impacted global and euro area economic activity since early 2020.

As restrictions were imposed to mitigate the spread of the deadly virus, business activity deteriorated and thousands of jobs were lost. Economic data within the euro area – presumed to be already weak before the pandemic, reflected the adverse impact of strict lockdown measures introduced around mid-March in most euro area countries. Ensuing the significant drop in activity and a Q1 slump, euro area GDP, fell by a further 11.8%, into a recessionary environment.

On the back of the gradual relaxation of measures along with behavioural changes in response to the pandemic, economic figures across all member states, not just those enjoying more robust fundamentals, rebounded, portraying signs of improvement – at times surpassing market expectations and suggesting that the recovery in the single currency bloc may be closer to a ‘V-shape’ than initially anticipated.

Notably, in the second quarter, following the gradual removal of movement restrictions and thus resumption in business activity, PMI indices – an index of the prevailing direction of economic trends in both the manufacturing and service sectors, significantly improved, exceeding pre-coronavirus levels, heading to multi-year highs.

In contrast to the more recent readings, for the month of September, the said economic indicators came in mixed.

In September, the IHS Markit Eurozone Manufacturing PMI rose to 53.7, from 51.7 in the previous month and beating market expectations of 51.9. The PMI reading pointed to the steepest month of expansion in the manufacturing sector since August 2018 as output growth accelerated, the fastest since February 2018, this being fuelled by the largest increased in new orders witnessed over this period. Employment within the manufacturing industry fell at a softer pace while backlogs of work increased.

Contrary to the latter expansion, in September, Eurozone services activity unexpectedly contracted, fuelling concerns that the surge in infections and the tightening of restrictions imposed, are already choking the region’s economic recovery. After two months of expansion, the IHS Markit Eurozone Services PMI fell to 47.6, from 50.5 in the previous month and below market expectations of 50.5. Although the decline ran far weaker than previously witnessed at the height of the pandemic, the output contraction was the largest since May. Unemployment within the services sector increased slightly while backlogs of work fell faster due to a drop in inflows of new business.

Also, the IHS Markit Composite PMI, in September fell to 50.1 from 51.9 in August, worse than market forecasts of 51.7.

Undoubtedly, the said PMI figures do portray a skewed impact on the euro area economy. A two-speed economy is now evident, with manufacturing, buoyed by increased demand, witnessing growth while services, heading back to a contraction, as businesses reliant on face-to-face interaction have once again been hit by the increased number of Covid-19 cases. Undoubtedly, as the number of Covid-19 cases continue to rise across Europe, lower demand from cautious consumers shall likely continue to weigh on activity.

Yields, factoring-in the increased uncertainty, stemming from the possibility of governments needing to half-heartedly reintroduce movement restrictions to mitigate spread, inched lower.

Inevitably, the euro area continues to be surrounded by high economic uncertainties. The unexpected surge in Covid-19 cases across Europe is once again tainting the area’s economic recovery and possibly exerting further pressure on policy makers to act accordingly. Given the bureaucratic element surrounding the European Union in terms of a conjunct effort of fiscal packages, the ECB may once again prove to be a decisive playmaker in stimulating the economy by expanding on its diverse monetary policy tools.

Disclaimer: This article was issued by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. For more information, visit, https://cc.com.mt/. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.

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