Eurozone crisis: Brussels on alert as devastating growth update sets alarm bells ringing


Eurozone crisis: Brussels on alert as devastating growth update sets alarm bells ringing

IHS Markit's flash Composite Purchasing Managers' Index, seen as a good gauge of economic health, sank to 51.6 from July's final reading of 54.9. T

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IHS Markit’s flash Composite Purchasing Managers’ Index, seen as a good gauge of economic health, sank to 51.6 from July’s final reading of 54.9. The report said: “August saw a loss of growth momentum across the eurozone private sector following a rebound from the coronavirus disease 2019 (COVID-19) related downturn.

“Both business activity and new orders rose modestly, and at slower rates than in July.” 

The results saw the euro reverse earlier gains to fall. 

The single currency had been falling before the results were released but then extended losses and was last down 0.5 percent at $1.1806.

To contain the spread of the virus, which has infected over 22.5 million people globally, governments imposed strict lockdowns – forcing businesses to close and citizens to stay home, bringing economic activity to a near halt.

After many of those restrictions were relaxed, activity in the eurozone expanded last month at the fastest pace since mid-2018. But as infection rates have risen again in parts of the region, some earlier curbs have been reinstated.

Andrew Harker, economics director at IHS Markit, said: “The euro zone’s rebound lost momentum in August, highlighting the inherent demand weakness caused by the COVID-19 pandemic.”

READ MORE: Germany warned of ‘slow progress’ in recovery from coronavirus

“The recovery was undermined by signs of rising virus cases in various parts of the euro area.”

Michael Hewson, Chief Market Analyst at CMC Markets, said: “The latest flash PMI data for August in France and Germany would appear to point to a plateauing in economic activity, particularly in the services sector, where rising infection rates here could well be tempering economic activity on the margins.” 

An index measuring new business dropped to 51.4 from 52.7 and once again some of August’s activity was derived by businesses completing backlogs of work.

Meanwhile, growth in the bloc’s dominant service sector stalled – its PMI plummeted to 50.1 from 54.7. 

With demand waning, services firms cut headcount for a sixth month and more sharply than in July.

The employment index fell to 47.7 from 47.9.

Still, factory activity – which didn’t suffer quite as sharp a decline as the service industry during the height of the pandemic – expanded for a second month.

The manufacturing PMI dipped to 51.7 from 51.8.

An index measuring output, which feeds into the composite PMI, rose to 55.7 from 55.3.

Suggesting factory purchasing managers don’t expect a big pick up in activity, they bought fewer raw materials. The quantity of purchases index only rose to 49.6 from 48.3.

A full bounceback from the euro zone’s deepest recession on record will take two years or more, according to a Reuters poll of economists published on Thursday.

Mr Harker added: “The eurozone stands at a crossroads, with growth either set to pick back up in coming months or continue to falter following the initial post-lockdown rebound.”