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Eurozone’s contraction deeper than initially anticipated

ToM07.01

The rapid rise in coronavirus cases and renewed movement restrictions at the end of the year, although to a far lesser extent, certainly weighed on the Eurozone’s economic recovery.

Albeit improving from November’s PMI readings, the Eurozone economy for a second successive month was stuck in a downturn, contracting more sharply than previously anticipated, as countries stepped up their fight to curb the rapid rise in coronavirus cases.

In December, the Eurozone Services PMI was revised lower to 46.4 in December 2020, down from a preliminary estimate of 47.3, yet higher than November’s six-month low of 41.7.

Output, albeit at a softer pace, contracted for a fourth straight month, with all nations except Ireland registering a decline in activity. Italy recorded the sharpest reduction in activity, followed by Germany, Spain, and France. New orders dropped for a fifth consecutive month, with exports once more falling sharply due to ongoing strict travel restrictions, while employment continued to contract. Although intensifying during the period under review, price pressures remained relatively benign compared to the survey’s historical average.

Italy’s services PMI, as conferred; Eurozone’s worst hit, remained within contraction territory for the fifth consecutive month, as restrictive measures imposed continued to take their toll on the sector. Although edging slightly higher to 39.7 from November’s reading of 39.4, Italy’s services PMI came in well below market expectations of 45.3. Consequent to a decline in new work inflows, unemployment increased.

Lockdown measures to contain the spread and thus mitigate the strain posed by a second coronavirus wave kept Germany’s services sector in contraction territory for a third month in a row. Although higher from November’s reading, Germany’s services PMI was revised lower to 47 from a preliminary estimate of 47.7. December’s contraction was confined mainly to consumer-facing sectors as activity shrank sharply for restaurants and hotels.

In December, Spain’s services PMI rose to 48, from 38.5 in November, as vaccine news helped to ease Spain’s services decline. Albeit higher than a flash value of 45, the reading, which pointed to the softest contraction in five months, remained below the 50 mark, which separates growth from contraction. On the back of positive coronavirus vaccine developments, confidence in Spain’s future direction significantly improved, pointing to a two-and-a-half-year high.

Following a significant slump in November, French business activity was within a whisker of returning to growth as the second stint of coronavirus lockdown measures were lifted, ultimately boosting services. The reading of 49.1, came in marginally below a preliminary estimate of 49.2 – the softest in the current four-month sequence of falls.

Meanwhile, Eurozone’s Composite PMI – an index which tracks business trends across both the manufacturing and service sectors, remained in contractionary territory at 49.1, higher than November’s six-month low of 45.3, and lower than preliminary estimates of 49.8.

Undoubtedly, services remained the main drag on the Eurozone’s economic output.

While services once again fell for the fourth consecutive month, consequent to the imposition of movement and social distancing restrictions, manufacturing showed greater resilience, expanding for a sixth successive month and faster when compared to November’s reading.

While businesses have become more optimistic on activity in a year’s time thanks to vaccination developments, the near-term outlook remains uncertain. As long as the infection rate across Europe continues to soar, movement restrictions will remain, ultimately detrimental to the services sector and Eurozone’s economic recovery.

Certainly, the vaccine roll-out in the coming weeks shall prove crucial for a more constructive economic recovery.

Disclaimer: This article was written by Christopher Cutajar, Credit Analyst at Calamatta Cuschieri. The article is issued by Calamatta Cuschieri Investment Services Ltd and is licensed to conduct investment services business under the Investments Services Act by the MFSA and is also registered as a Tied Insurance Intermediary under the Insurance Distribution Act 2018.

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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