Euro zone deep downturn eased in May, growth some way off: PMI

(C) Reuters. The coronavirus disease (COVID-19) outbreak in Naples

LONDON (Reuters) – Euro zone businesses suffered another devastating contraction in activity in May and while there are signs the worst is over, it could be months before there is a return to growth, a survey showed on Wednesday.

Governments across the region have gradually started to lift tough lockdown measures imposed to contain the spread of the novel coronavirus which has infected nearly 6.4 million people and killed over 379,000.

But with citizens — many of whom are facing threats to their incomes as well as their health — still encouraged to stay at home, and swathes of businesses remaining shuttered, IHS Markit’s May Final Composite Purchasing Managers’ Index (PMI) painted a gloomy picture.

Although the survey’s headline index jumped to 31.9 from April’s 13.6, which had been by far the lowest reading since the survey began in mid-1998, it was a long way from the 50-mark separating growth from contraction. The flash estimate was 30.5.

“The scale and breadth of the euro zone downturn was highlighted by the PMI data showing all countries enduring another month of sharply falling business activity,” said Chris Williamson, chief business economist at IHS Markit.

“Euro zone GDP is consequently set to fall at an unprecedented rate in the second quarter, accompanied by the largest rise in unemployment seen in the history of the euro area.”

A Reuters poll last month predicted the bloc’s economy would contract 11.3% this quarter and unemployment would be around 10% each quarter for the rest of this year.

An index in the PMI covering employment showed firms were cutting jobs at a near-record pace, registering 37.8 compared to April’s survey low of 33.4.

“The outlook is scarred by the prospect of demand remaining weak due to household spending being hit by high levels of unemployment and corporate spending being subdued as companies repair balance sheets,” Williamson said.

“We therefore remain cautious with respect to the recovery.”

A headline index for the bloc’s dominant service industry recovered to 30.5 from April’s record low of 12.0 but held firmly below the breakeven mark. The flash reading was 28.7.

Demand fell again, and backlogs of work were run down rapidly, yet services firms were far less pessimistic about the 12-month ahead outlook. Their business expectations index jumped to 47.6 from 34.3.