Europe’s Economy Starts to Lose Its Recovery Momentum

(Bloomberg) -- The euro area’s recovery ran out of steam midway through the third quarter, with gauges of activity pointing to contractions in Italy and Spain.

While manufacturing output rose markedly in August, the larger services sector saw only marginal growth, according to an IHS Markit report. Orders increased at a slower pace, job cuts continued and confidence about the outlook eased. A separate report showed an unexpected decline in retail sales in July.

“The rebound has lost almost all momentum,” said Chris Williamson, an economist IHS Markit. “The autumn is likely to still see the economy rebound strongly from the collapse witnessed in the spring,” but “the survey highlights how policy makers will need to remain focused firmly on sustaining the recovery.”

Coming in a week that saw the euro-area inflation rate drop below zero for the first time in four years, the PMI weakness is another worrying sign for the European Central Bank. Policy makers meet next week, though it’s not clear if they’ll boost stimulus again just yet.

The decline in euro-area retail sales follows big gains in May and June as lockdowns were eased. But job concerns as unemployment edges higher could mean consumer favor saving over spending, which would damp retail demand in the coming months.

What Bloomberg’s Economists Say...

“Signs have emerged that the euro area’s recovery has slowed, virus cases are on the rise and inflation has decelerated sharply. The Governing Council may indicate next week that downside risks have intensified, signaling monetary policy could be loosened further before the end of the year.”

--David Powell. Read the full ECB PREVIEW

Governments are also trying to help the recovery along with more stimulus spending. France this week unveiled details of a 100 billion-euro stimulus plan, and German Chancellor Angela Merkel’s parliamentary caucus backed plans allowing for further extraordinary deficit spending next year.

Markit’s composite index of both sectors fell to 51.9 in August from 54.9 in July. Readings for Germany and France eased, while Italy slipped slipped below the 50 line that divides expansion from contraction.

The report also pointed to an ongoing squeeze on profit margins, with businesses forced to cut prices to help sales even as costs increased.

In August, “the deterioration was often linked to worries of resurgent Covid-19 infection rates, notably among consumer-facing companies and especially in Spain and Italy, where virus containment measures remained particularly strict,” Williamson said.

Separate figures Thursday showed that the Greek economy shrank 14% in the second quarter, falling to levels not seen since 1997. The drop was the result of a 32.1% decline in exports and an 11.3% fall in private consumption. To help the recovery, Prime Minister Kyriakos Mitsotakis is expected to announce in the coming weeks more support measures and the extension of some already in place.

©2020 Bloomberg L.P.