Eurozone Business Activity Shrinks As Fear Creeps Back

Business activity fell for the first time since June

  • Eurozone composite PMI slips below 50 into contraction territory
  • Manufacturing sectors and Germany's economy show strength
  • EU deficit and government debt balloon to 11.4% of GDP and 87.8% of GDP

Europe is currently confronting a second wave of the COVID-19 virus and reimposing lockdown measures that strangled its economic growth this year. Adding to the gloom are signs that the resurgence is already impacting its economies. Flash estimates show business activity reversed and fell back into decline for the first time since June at the start of the fourth quarter. "Accelerating growth of manufacturing output was overwhelmed by a steepening deterioration in the service sector amid rising COVID-19 worries," according to IHS Markit.

Europe PMI

The flash IHS Markit Eurozone Composite PMI dropped from 50.4 in September to 49.4 in October. Germany continued with a steady recovery on the back of its mighty manufacturing sector whose output grew at a rate surpassed only twice in the survey’s nearly 25-year history. Service sector activity fell for the first time since June in the country. In the bloc’s second-largest economy, France, the economic deterioration sped up with Composite PMI falling deeper in contraction territory to 47.3. from 48.5 in September. 

Yesterday the statistical office of the European Union announced historic borrowing figures for the region. In the second quarter, government deficit (seasonally adjusted) was at 11.6% of GDP in the 19-country eurozone and 11.4% of GDP in the 27-country European Union as a whole. These represent both the highest deficits and the sharpest quarter-on-quarter increases since 2002 when records began. 

EU debt
Source: Eurostat.

Government debt-to-GDP ratios rose to 95.1% and 87.8% in the eurozone and EU, respectively, at the end of the second quarter. Compared with the first quarter of the year, all of the EU countries registered an increase in their debt-to-GDP ratio. The largest increases were observed in Cyprus (+17.1 percentage points – pp), France (+12.8 pp), Italy (+11.8 pp), Spain (+11.1 pp), Croatia and Belgium (both +11.0 pp), Slovakia (+10.6 pp), and Greece (+10.5 pp).

The asymmetric effect the pandemic has had and precarious economic situations in countries like Spain and Greece raise the question of whether the EU should become a fiscal union or at least a temporary fiscal union to share the burden. 

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