Covid recovery in eurozone stalls, dimming hopes of V-shaped climb back

The eurozone’s recovery from its deepest economic downturn on record hit the brakes in August, as pent-up demand unleashed by the easing of coronavirus lockdowns dwindled, according to a closely watched survey.

After many of the initial Covid-19 restrictions were relaxed, activity in the eurozone expanded in July 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.

The latest data, which was published on Friday and focused on the services and manufacturing sectors, is likely to concern policymakers and diminish hopes for a V-shaped recovery, signalling slowing growth. IHS Markit’s flash composite purchasing managers’ index (PMI) fell from 54.9 in July to 51.6. Any number above 50 signals growth.

“The fallback in the eurozone composite PMI in August suggests the initial V-shaped rebound following the lifting of the lockdowns is already fizzling out,” said Jessica Hinds at Capital Economics.

The flow of new business for firms slowed and once again some of August’s activity was derived by companies completing work backlogs. Germany and France, the bloc’s two biggest economies, also lost economic momentum this month, driven by a services slowdown.

Apart from those economies, activity decreased marginally in August, IHS Markit said.Growth in the eurozone’s dominant service sector stalled, with

the its PMI index falling to 50.1 from 54.7.With demand waning, the bloc’s services firms cut headcount for a sixth month in a row, and more sharply than in July. Economists noted the employment components of the PMIs suggested more gloom ahead in the jobs market.

“Those numbers indicate that the worst is yet to be seen in the euro area labour market and clearly points to a gradual recovery path,” said Tuuli Koivu at Nordea Markets.

Factory activity – which did not experience quite as sharp a decline as the service industry during the height of the pandemic – expanded for a second month.

But in a sign that factory purchasing managers do not expect a big pick up in activity, they again bought fewer raw materials than in the previous month.

EU leaders agreed last month a €750bn (£674bn) pandemic recovery fund, but the relief does not kick in until next year. For its part, the European

Central Bank is expected to keep monetary policy ultra-loose for a long time.

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