Europe’s Covid-19 lockdown measures push economies into deeper decline

PMI figures for Germany and France pointed to unprecedented slumps with the UK data even grimmer

Volkswagen cars stand at a parking area during the production restart of the plant of the German manufacturer Volkswagen AG (VW) in Zwickau, Germany, Thursday, April 23, 2020. Volkswagen starts with step-by-step resumption of production. The car company are completely converting the plant in Zwickau from 100 percent combustion engine to 100 percent electric. (AP Photo/Jens Meyer)

Europe’s economies suffered a massive blow in April when government restrictions to contain the coronavirus left companies scrambling to stay afloat.

An estimate of private-sector activity in the euro area plunged to just 13.5 from 29.7 in March, IHS Markit said on  Thursday. The drop was far sharper than economists had anticipated and marks the lowest reading for the Purchasing Managers’ Index since it began more than two decades ago.

The report is a grim preview for European leaders, who will discuss a possible €2 trillion (Dh7.93tn) rescue plan for the region on Thursday. Governments have already pledged billions of euros in aid, and the European Central Bank on Wednesday stepped up its efforts to shield the most vulnerable countries.

Hopes are pinned on containment measures being slowly lifted to help ease the paralysis.

The PMI echoes other surveys that suggest Europe, and the global economy, are heading for a sharp recession because of government clampdowns on movement and business. The International Monetary Fund says the slump could be the steepest in almost a century and forecasts the euro area could shrink 7.5 per cent this year.

With huge parts of the region’s economy effectively shut down, new business in both manufacturing and services fell at a record pace in April, IHS Markit said. The latter bore the brunt, reflecting the hit to the leisure industry, airlines, restaurants and hotels.

Figures for Germany and France, the euro region’s two biggest economies, pointed to unprecedented slumps at the start of the second quarter, plummeting to 17.1 and 11.2 respectively – far lower than the already dismal readings in March of 35.0 and 28.9.

The national statistics office in France, INSEE, said on Thursday the country's economy was reduced to just "vital functions," estimating private-sector activity had plunged 41 per cent.

The PMI figures were "shockingly bad," said another analysis firm, Capital Economics.

It said France's reading compared with Germany reflected stricter lockdown measures ordered by the government.

It was an even grimmer picture in the UK, where the coronavirus hit the economy with more force than any forecaster had feared as businesses reported a historic collapse in demand during a nationwide lockdown.

Its PMI fell to a new record low of 12.9, and the scale of the collapse all but guarantees a huge contraction in the world's fifth-largest economy. That will add to doubts about whether the financial help offered by the government is reaching businesses quickly enough.

Britain's economy will contract 13.1 per cent this quarter, a Reuters poll predicted earlier on Thursday, which would be the biggest quarterly drop since the Second World War.

Stocks and other risky assets barely batted an eyelid on the PMIs, most of which is made up of backward-looking data, as caution set in ahead of a Eurogroup meeting to discuss joint stimulus measures. That caution also offset optimism over a fresh round of US coronavirus aid and a rebound in oil prices.

"The rather muted reaction relative to the amplitude of the misses proves the lack of surprise for markets, which are almost immune to data at the moment," said Olivier Konzeoue at Saxo Markets.

The eurozone survey also showed another decline in confidence, as well as record job cuts. Some of the employment decline reflects furloughed workers, though if the situation persists, companies may be forced to actually lay them off.

Some governments have begun to ease restrictions, slowly reopening their economies to help companies and employees brutally squeezed by the shutdown. But countries are aware that they don’t have the all clear on the virus, so it’s far from returning to business-as-usual.

“Hopes are pinned on containment measures being slowly lifted to help ease the paralysis,” said Chris Williamson, chief business economists at IHS Markit. “However, progress looks set to be painfully slow to prevent a second wave of infections. In the face of such a prolonged slump in demand, job losses could intensify from the current record pace and new fears will be raised as to the economic cost of containing the virus.”