July 24, 2020 / 8:30 AM / 18 days ago

Euro zone businesses bounce back in July as lockdowns loosen

LONDON (Reuters) - Euro zone business activity grew in July for the first time since the coronavirus pandemic hit, as more parts of the economy that were locked down to curtail its spread reopened and people emerged from their homes to work and spend money.

FILE PHOTO: People are seen in front of the entrance of the Rhein Center shopping mall after the re-opening of the borders, amid the coronavirus disease (COVID-19) outbreak, in Weil am Rhein, Germany June 15, 2020. REUTERS/Arnd Wiegmann/File Photo

Across the world almost 15.5 million people have been infected by the coronavirus but as the rate of infections has eased across much of Europe, governments have loosened some restrictions.

That unleashing of pent-up demand pushed IHS Markit’s flash Composite Purchasing Managers’ Index (PMI), seen as a good indicator of the bloc’s economic health, to 54.8 in July from June’s final reading of 48.5, its highest since mid-2018 and well ahead of the 51.1 forecast in a Reuters poll.

“The sharp rise... is an encouraging sign that the economic recovery continued at a decent pace. But we suspect that activity will remain below pre-crisis levels for at least the next couple of years,” said Jack Allen-Reynolds at Capital Economics.

The headline index had been below the 50 mark which separates growth from contraction since March so a return to positive territory will be welcomed by policymakers and governments who have pumped trillions of euros into the economy.

European Union leaders agreed a 750 billion euro (683 billion pounds) pandemic recovery fund on Tuesday and with European Central Bank monetary policy expected to stay ultra-loose for a long time, optimism about the year ahead improved.

Markets are still expecting a V-shaped recovery - as are some economists - but while Friday’s data indicated a bounceback of sorts, it is unlikely to support those views.

“A V-shaped recovery seems quite unrealistic, despite the encouraging numbers,” said Bert Colijn at ING.

French business activity rebounded far more than expected as a post-lockdown recovery in the service sector shifted up a gear, PMI data showed.

Manufacturing activity in Germany stabilised, avoiding a contraction for the first time in 19 months, giving hope for a recovery from a long recession exacerbated by the pandemic.

Meanwhile British businesses, outside the euro zone, experienced the fastest upturn in five years during July as more of the economy reopened and shoppers pushed their spending back up to within a whisker of pre-lockdown levels.

Official data showed Britain’s economy shrank more than 25% in March and April, and recovered less than expected in May. A Reuters poll this week suggested the economy would contract more than 9% this year.

JOBS THREAT

As demand increased, euro zone firms cut their headcount at a shallower rate and purchasing managers were at their most optimistic since February, just before Europe began to feel the full brunt of the pandemic.

The new business index rose to its highest reading since October 2018, suggesting the recovery would extend into August, but there are fears with jobs still being shed and coronavirus containment measures still in place the upswing could be derailed.

Still, a survey of the bloc’s dominant service industry, which was hardest hit by the government-imposed lockdowns, climbed above the breakeven mark to its highest since mid-2018.

But some of the resurgence in demand was driven by firms cutting prices for a fifth month, albeit at a shallower rate than in June.

The manufacturing industry also returned to growth with the factory PMI rising to 51.1 from 47.4, its first time above breakeven since January 2019 and ahead of predictions. An index measuring output, which feeds into the Composite PMI, jumped into growth territory.

Reporting by Jonathan Cable; Editing by Toby Chopra

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