Shoppers on Zeil Strasse in Frankfurt, Germany. The resurgence in coronavirus cases is threatening the eurozone’s economic recovery
Shoppers on Zeil Strasse in Frankfurt, Germany. The resurgence in coronavirus cases is threatening the eurozone’s economic recovery © Bloomberg

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Eurozone services activity declined in September according to a widely watched business sentiment survey, fuelling economists’ concerns that a resurgence in coronavirus cases threatens the bloc’s economic recovery.

The IHS Markit flash eurozone purchasing managers’ index for services fell to 47.6 in September, from 50.5 in the previous month, data published on Wednesday showed.

It was the first time in three months that the reading had dropped below the 50 mark, and the lowest level since May. Economists polled by Reuters had expected the level would remain unchanged month-on-month.

A reading of below 50 indicates that the majority of businesses reported a contraction in activity compared with the previous month. But the sentiment surveys are not a measure of the extent to which economic activity has recovered relative to the pre-virus level and, while they signal how broad-based the recovery is, they cannot measure its pace.

Services sentiment indices fell in Germany and France, the eurozone’s two largest economies.

By contrast, manufacturing activity continued to improve. The eurozone manufacturing PMI rose to 53.7 in September, the highest in two years and up from 51.7 the previous month.

Germany’s manufacturing PMI rose to 56.6 in September, from 52.2 the previous month, while French manufacturing showed a marginal increase to 50.9 in September, from 49.8 in the previous month.

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However, services are the eurozone’s dominant sector and the bloc’s composite index — an average of the two sectors — dropped to 50.1 in September, from 51.9 in the previous month.

“The eurozone’s economic recovery stalled in September, as rising Covid-19 infections led to a renewed downturn of service sector activity across the region,” said Chris Williamson, chief business economist at IHS Markit. 

Factories reported a boost to production from rising exports and the reopening of retailers in many countries, but “the larger service sector has sunk back into decline as face-to-face consumer businesses in particular have been hit by intensifying virus concerns”, he added.

“Today’s data suggest that the recovery is grinding to a halt, at least outside the German manufacturing sector,” said Jessica Hinds, economist at Capital Economics. “With no sign that the resurgence in virus cases has been stamped out, there is a clear and growing risk that it goes into reverse, at least in the countries worst affected by the virus.”

Economists warned that the growing signs that the fragile economic rebound was running out of steam meant the bloc risked a double-dip recession.

Christoph Weil, an economist at Commerzbank, said the eurozone’s services index was “clearly in recession territory”.

German consumer confidence increased by less than expected in recent weeks, according to a separate monthly survey published on Wednesday by research organisation GfK. Rising infections and worries about job losses were weighing on sentiment, it reported. The airline Lufthansa and car parts maker Continental have warned in recent weeks that they plan to cut thousands of jobs.

The data increase pressure on the European Central Bank to consider more monetary stimulus.

“The recovery is under more pressure than previously thought,” said Bert Colijn, economist at ING. “For governments and ECB, this will be a wake-up call, if they needed one.”

Frederik Ducrozet, a strategist at Pictet Wealth Management, said: “This [sign of economic slowdown] comes on the back of significant fiscal support and before any stricter restrictions are put in place, calling for additional pre-emptive monetary easing to sustain the recovery.”

ECB policymakers have recently expressed diverging views about the seriousness of the slowdown.

This week ECB executive board member Fabio Panetta warned that “evolving shocks” were likely to hamper the recovery and said if this happened “a policy response is necessary and forthcoming”.

But fellow board member Yves Mersch told Bloomberg that “nothing is pointing to a further deterioration, at least not on the front of prices and production”.

The flash PMI surveys were conducted between September 11 and 22. Flash estimates are published one week before the final results and are based on about 85 per cent of the typical responses.

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