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Eurozone heads for 'dreaded double dip’ as recovery stalls

Paris -  Chesnot/Getty
Paris - Chesnot/Getty

Covid-19’s second wave is hitting the eurozone economy hard with businesses reporting painful slumps in activity as new restrictions came into force this month.

Job losses continued and optimism for the future faded as companies told IHS Markit’s purchasing managers’ index (PMI) survey that activity levels were sliding again, raising the spectre of a “double dip” recession.

The index slipped to 49.4 in October from 50.4 in September.

Any score of below 50 indicates business activity is falling, so the private sector economy is now in reverse.

Manufacturing is still growing as orders accelerate, but the dominant services sector shrank for the second month in a row as companies reliant on social contact were devastated by new coronavirus restrictions.

Germany, the eurozone’s largest economy, is still expanding. Its solid score of 54.5 is barely down from the previous month’s 54.7.

The industrial powerhouse recorded one of the strongest months in its history for manufacturing, which was enough to outweigh a fall in services output.

By contrast French PMI stumbled to 47.3, down from 48.5 in September.

The picture is even worse beyond those two big economies.

Excluding the height of the pandemic, this is the sharpest fall for the rest of the eurozone since 2013, when the currency area was in recession at the tail end of the sovereign debt and banking crisis.

“The eurozone is at increased risk of falling into a double-dip downturn as a second wave of virus infections led to a renewed fall in business activity in October,” said Chris Williamson, chief business economist at IHS Markit.

“While the overall downturn remains only modest, and far slighter than seen during the second quarter, the prospect of a slide back into recession will exert greater pressure on the European Central Bank to add more stimulus and for national governments to help cushion the impact of Covid-19 containment measures, which not only tightened across the region in October but look set to be stepped up further in November.”

The split between manufacturing and services indicate the extent to which export demand is helping economies such as Germany, while the human contact required for many services is impeded.

“The most restrictive measures taken so far have hit the recreational sector more than other parts of the economy. That impacts the service sector disproportionately. The same holds true for the change in behaviour among the population, as services require more in-person interaction and rely more on personal consumption,” said Bert Colijn at ING.

“From here on, the path for the economy is highly uncertain. With cases continuing to rise at a worrying pace, more restrictive measures in the eurozone definitely cannot be ruled out. After a stellar third quarter GDP figure, we could be in for the dreaded double dip.”