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By Jonathan Cable
LONDON, June 3 (Reuters) – Euro zone businesses suffered another devastating contraction in activity in May and while there are signs the worst is over, it could be months before there is a return to growth, a survey showed on Wednesday.
Governments across the 19 countries that use the euro have gradually started to lift tough lockdown measures imposed to contain the spread of the novel coronavirus which has infected nearly 6.4 million people and killed over 379,000.
But with citizens — many of whom are facing threats to their incomes as well as their health — encouraged to stay at home, and swathes of businesses still shuttered, IHS Markit’s May Final Composite Purchasing Managers’ Index (PMI) painted a gloomy picture.
Although the headline index jumped to 31.9 from April’s 13.6 — by far the lowest reading since the survey began in mid-1998 — it was a long way from the 50 mark separating growth from contraction. The flash estimate was 30.5.
“The final Composite PMIs add to the evidence that economic activity picked up in May, but it remains well below normal,” said Jack Allen-Reynolds at Capital Economics.
World shares nevertheless hit new three-month highs on Wednesday and the dollar fell for the sixth day running as hopes for more monetary stimulus and easing of lockdowns gave the market confidence, despite the civil unrest in the United States and the continuing impact of the pandemic.
The European Central Bank will ramp up its bond-buying again through its Pandemic Emergency Purchase Programme on Thursday, a Reuters poll predicted last month.
“Our central case is that the ECB will announce a 500 billion euro increase in the size of its PEPP to 1.25 trillion euros, with the risks skewed toward a larger increase to 1.5 trillion euros,” said Luigi Speranza at BNP Paribas.
Last month’s Reuters poll predicted the bloc’s economy would contract 11.3% this quarter and unemployment would be around 10% each quarter for the rest of this year.
An index in the PMI covering employment showed firms were cutting jobs at a near-record pace, registering 37.8 compared to April’s survey low of 33.4.
Even though restaurants, hotels, fitness studios and some entertainment venues have been allowed to reopen under restrictions in Germany, economists say a return to pre-crisis levels of business will be slow and job losses are mounting.
Germany’s unemployment rate jumped to 6.3% last month and the labour market remains under immense pressure due to the coronavirus pandemic, official data showed.
Activity in the German services sector declined at a slower pace after a record contraction the previous month as restrictions to contain the coronavirus in Europe’s largest economy were lifted, earlier data showed.
It was a similar story in France, where service sector activity improved more than initially thought as the country began emerging from its lockdown, although it remained at depressed levels.
Britain, outside the currency union, remained in a severe economic downturn although the pace of the slump moderated from April’s crash as some companies benefited from the easing of lockdowns around the world.
A headline PMI for the euro zone’s dominant service industry recovered to 30.5 from April’s record low of 12.0 but held firmly below the breakeven mark. The flash reading was 28.7.
Demand fell again, and backlogs of work were run down rapidly, yet services firms were far less pessimistic about the outlook for the next 12 months. Their business expectations index jumped to 47.6 from 34.3.
Reporting by Jonathan Cable; Editing by Catherine Evans