Britain and the eurozone are on course to enter a double-dip recession this winter, as business surveys show economic growth stalling amid rising coronavirus cases and heightened restrictions to contain the pandemic.
The seasonally adjusted IHS Markit/CIPS services Purchasing Managers’ Index (PMI) for the UK fell to a four-month low of 51.4 in October from 56.1 in September, while Eurozone composite PMI dropped to 50 last month from September’s 50.4.
The eurozone figure was dragged down by the services PMI, which fell to 46.9 in October from 48.0 the previous month, its lowest reading since May when the first Covid-19 wave was peaking in Europe. The index is a gauge of economic health, with a reading above the neutral 50 mark indicating expansion, while a reading below points to contraction.
IHS Markit economist Tim Moore said the October data indicates that the UK service sector “was close to stalling even before the announcement of lockdown one in England”.
“The UK economy seems on course for a double-dip recession this winter and a far more challenging path to recovery in 2021," he added.
Meanwhile, Jessica Hinds, Europe economist at Capital Economic said the eurozone’s final composite PMIs show economic activity flatlined in October.
“With countries throughout the region entering new lockdowns or substantially tightening restrictions in November, the eurozone economy is likely to contract once again in Q4,” she said.
“Overall, we expect the measures, which we assume will be in place for three months, to cause eurozone GDP to contract by about 3 per cent in Q4 and then stagnate in Q1.”
From Thursday, all non-essential shops, pubs and restaurants in England will close for four weeks, unless they serve takeaway food, with office staff encouraged to work from home.
The restrictions are less wide-ranging than the first lockdown, with schools and universities staying open, and the construction, manufacturing and property sectors still operating. This will cause a less severe hit on economic output, according to the National Institute of Economic and Social Research.
British GDP slumped by 20 per cent during the longer lockdown in the second quarter of 2020, the biggest decline of any major advanced economy, and could collapse by 12 per cent in November, according to the NIESR, leading to a W-shaped recovery.
In Germany and France – the eurozone's two biggest economies – tough lockdown measures have been re-imposed with restaurants, gyms and shops closed and residents staying at home.
The IHS Markit surveys were conducted largely before new restrictions were put in place across Europe but forward-looking indicators were already bleak.
Services firms cut headcount for an eighth successive month, demand dropped further, backlogs of work were again depleted and optimism waned. The euro zone's business expectations index – which generally has only been lower this year and during the last two financial crises – sank to 54.2 from 59.2.
The European Central Bank said last week it would take new action in December to contain the widening economic fallout, while the Bank of England is widely expected to boost its stimulus package on Thursday.
Today’s data “confirmed the deterioration of the bloc’s near-term outlook”, said Maddalena Martini, eurozone economist at Oxford Economics, with the worsening of the health situation and the re-imposed restrictions set to hit the services sector further.
In Italy, the services PMI dropped to 46.7 in October from 48.8 the previous month, as a decline in activity and new business weighed on the sector, with foreign demand suffering a particularly sharp fall and firms reducing their staff at the fastest pace since July.
Similarly, Spain, the worst hit economy, saw activity in the services sector suffer from the resurgence of Covid-19 and lack of tourist activity.
"Even though confidence about the year ahead reached its highest since June, we expect Spain’s services sector will take long time to recover," said Ms Martini.
