Europe suffers record collapse in economic activity
Drop in services-sector activity is unprecedented
Business activity in the U.S., Europe and Japan collapsed in April as governments tightened restrictions on movement and social interaction aimed at limiting the spread of the coronavirus, according to surveys of purchasing managers.
The surveys, out Thursday, suggest governments have effectively closed parts of the economy where face-to-face interaction is unavoidable—such as restaurants and barbers— and activity has tumbled in parts of the economy less directly affected.
The drop in services-sector activity is unprecedented in the history of the surveys, even in the wake of the global financial crisis. Manufacturing activity is also contracting though not quite as severely.
According to data firm IHS Markit, the composite Purchasing Managers Index for the U.S.—a measure of activity in the private sector—fell to 27.4 in April from 40.9 in March. A reading below 50.0 indicates that activity has fallen, and the lower the figure, the larger the fall.
The April reading was the lowest in data dating back to October 2009.
“The scale of the fall in the PMI adds to signs that the second quarter will see an historically dramatic contraction of the economy,” said Chris Williamson, chief business economist at IHS Markit.
In the eurozone, the index dropped to 13.5 in April from 29.7 in March, a record low for data going back to July 1998. The lowest level reached in the wake of the global financial crisis was 36.2 in February 2009.
In the U.K., the composite PMI fell to 12.9, a record low, from 36.0 in March. Japan’s composite measure also hit a record low of 27.8.
The declines were larger than expected, suggesting economic contractions in the second quarter of 2020 may be larger than economists had expected.
“While we knew lockdowns were shutting down large parts of the economy and expected the PMIs to decline from March, the scale of the falls in today’s release was staggering,” said Rosie Colthorpe, an economist at Oxford Economics.
The lockdowns now weighing on economies in the U.S. and Europe were pioneered in east Asia, where the coronavirus outbreak began.
Figures released by South Korea Thursday suggested the economic cost of its restrictions was relatively modest in the first three months of the year, with gross domestic product falling by 1.4% compared with the final three months of 2019.
In China, the decline in GDP over the same period was 9.8%.
J.P. Morgan sees GDP in the
U.S. falling at an annualized rate of 40% in the three months through June, the eurozone tumbling 45%, with the U.K. economy expected to contract by 59.3% and Japan by 35%.
Some forecasts are for a relatively quick rebound, though the outlook depends on how quickly and thoroughly the coronavirus can be contained.
“You have to answer the medical question first, and I just don’t know,” said Todd Bluedorn, chairman and chief executive of cooling and heating manufacturer Lennox International, this week on an earnings call.
“And so look, if we have therapeutics in two months, I’d say it’s, Katy, bar the door. If it’s three years and we’re still searching for a vaccine, then the barn’s burned down.”
Some economists believe that the April readings are as low as the PMIs will go, partly because some countries—including Germany—and some U.S. states have begun to ease their restrictions, and others are expected to follow in May.
Also, the indexes can only fall so far—French service providers experienced the largest decline in activity during a single month for any sector in any country on record.
Health experts have cautioned that moving too quickly to reopen economies could lead to another wave of the disease.
“It’s hard to tell whether this is the bottom or not. It really depends on containment and how fast the economy can be reopened,” said Rubeela Farooqi, chief U.S. economist at High Frequency Economics.
Social distancing in some form is likely to continue for many months to come, whether by individual choice or government edict. That means activity is unlikely to rebound as quickly as it declined.
The surveys suggest it is almost certain the global economy has entered a recession, with figures for the first three months of the year pointing to widespread drops in economic output.
The U.S. and the eurozone will release estimates for the first quarter next week that are expected to show larger falls, but they will likely be modest compared with the contractions predicted for the April-June period.