Eurozone and UK business activity shrank in November as lockdowns bite

Dour PMI readings reflect tough month after governments tightened restrictions to contain Covid

A shopper passes a closed store in London during the lockdown, which ended on December 2. Composite PMI for the UK dipped slightly in November to 49.0 from 52.1. EPA

Business activity in the eurozone and Britain contracted in November as governments tightened lockdown measures to curb a second wave of Covid-19.

IHS Markit's composite Purchasing Managers Index for the eurozone, considered a good gauge of economic health, fell to 45.3 in November from October's 50.0, with a reading below 50 indicating contraction, and a figure above indicating growth. However, this was higher than an earlier flash reading of 45.1.

Meanwhile, the composite PMI for the UK dipped slightly to 49.0 from 52.1 as the country underwent a nationwide partial lockdown, the lowest level since June but a smaller drop than an initial estimate of 47.4.

"The eurozone economy slipped back into a downturn in November as governments stepped up the fight against Covid-19, with business activity hit once again by new restrictions to fight off second waves of virus infections," said Chris Williamson, chief business economist at IHS Markit.

A separate PMI covering the eurozone’s services industry fell to 41.7 from October's 46.9, marking its third month below the breakeven mark and the lowest reading since May, when the first wave of the virus swept across Europe.

Mr Williamson said the lower PMI readings reflected a far smaller decline than seen in the spring.

"Unlike earlier in the year, manufacturing has so far continued to expand, buoyed in part by recovering export demand, and the service sector is also seeing a much shallower downturn than during the first lockdowns," he said.

In the UK, activity in the services sector fell less than expected to 47.6 from 51.4 in October, with the lockdown also having a smaller impact on companies that the more stringent measures earlier in the year.

This was the first time since June that the index fell below the 50 level, but a smaller drop than the decline to 45.8 in an earlier 'flash' estimate, or the record-low reading of 13.4 in April.

"New lockdown measures and tighter pandemic restrictions unsurprisingly tipped UK private sector output back into decline. However, the collateral damage on sectors outside of hospitality, leisure and travel has been far more modest than in the first lockdown period," said Tim Moore, an IHS Markit economist.

Britain's economy suffered a record 25 per cent fall in output during the first lockdown in March and April, but the Bank of England expects output to contract just 2 per cent in the final three months of 2020.

News of effective Covid-19 vaccines during November bolstered business optimism in the UK's services PMI, which rose to its strongest since February's five-year high. However, job losses continued for a ninth consecutive month, the longest continuous run since 2010.

UK finance minister Rishi Sunak predicted last month that unemployment would hit 7.5 per cent of the workforce during the second quarter of next year, up from 4.8 per cent recorded in the three months to September.

The slew of dour PMI readings for Europe and the UK weighed on sentiment in European trading, according to Chris Beauchamp, chief market analyst at online trader IG.
"A more cautious mood has descended on stock markets in Europe this morning, after final PMI readings provided a less than stellar outlook for the region," he said.

"The rash of figures confirmed the pessimistic near-term view of the eurozone economy and for the UK as well, as service sectors across the continent remain in contraction territory."

However, losses are still relatively modest, said Mr Mahoney, as the figures reflect a tough month with lockdown measures bearing down on economic performance.

Looking closer at individual countries in the eurozone, business activity in France retreated as the second lockdown hurt the already suffering services sector, with the composite PMI falling to 40.6 from 47.5 in October, slightly higher than an early reading of 39.9.

The reading, the worst since May, came after the government imposed its second nationwide lockdown on October 30 amid escalating numbers of new Covid-19 infections.

"Similar to the trend when lockdown measures were imposed during the spring, activity fell most sharply at services firms, with hotels and restaurants experiencing a particularly steep decline," IHS Markit economist Eliot Kerr said.

The PMI services sector fell to 38.8 from 46.5 in October, again hitting its lowest level since May but performing slightly better than a preliminary reading of 38.0.

The picture was similar in Germany where the country’s second lockdown pushed the services sector deeper into recession in November, bringing overall private sector activity in Europe's largest economy almost to a standstill.

Restaurants, bars, hotels, gyms and entertainment venues were closed on November 2, while factories and shops remained open with social distancing conditions in place.

IHS Markit's final services PMI fell to 46.0 from 49.5 the previous month, a lower reading than expected and marking the second month in a row that the services index was below the 50 mark.

However, the fall in services activity was partly offset by strong manufacturing growth, with the final composite PMI, which covers both sectors of the economy, falling to 51.7 from 55.0 in October.

The situation in Spain was also bleak with its service sector activity shrinking in November in line with stricter business and travel restrictions.

Its services PMI, which accounts for about half of the country's economic output, fell to 39.5 in November from 41.4 in October. However, the second lockdown has been less detrimental than the first, when the headline service PMI reading plunged to a record low of 7.1 in April.

Italy’s services sector also contracted for a fourth straight month in November amid tighter movement restrictions with services PMI falling to 39.4 from 46.7 in October.

Again, it is an improvement from the first lockdown when the service sector index collapsed to a record low of 10.8 in April.

Italy's economy grew 15.9 per cent in the third quarter from the previous three months, data showed on Tuesday, following a massive contraction in the first half of the year.

However, the recovery looks under threat as despite factories remaining open during the second lockdown activity only increased slightly with the composite PMI for both services and manufacturing dropping to 42.7 from 49.2.

Jack Allen-Reynolds, senior Europe economist at Capital Economics, said the eurozone’s composite PMIs suggest that Germany will perform much better than the other major economies in the fourth quarter.

“The German Composite PMI remained above 50, implying that the virus containment measures there haven’t stopped the economy as a whole from growing. The French, Italian and Spanish Composite indices were all around 40, consistent with large declines in GDP,” said Mr Allen-Reynolds.

On a brighter note, eurozone retail sales increased more than expected in October, rising 1.5 per cent month-on-month in October after a 1.7 per cent monthly slump in September, according to Eurostat.

The increased rate for the 19 countries sharing the euro led to a 4.3 per cent annual rise, with internet and mail order sales driving the rally with jumps of 6.1 per cent on the month and 28.5 per cent on the year.

Mr Allen-Reynolds expects retail sales to drop back in November as lockdowns came into force.

“The daily mobility data that we have been tracking this year show big falls in trips for retail and recreation and we doubt that this will have been entirely offset by increased spending online,” he said.

IHS Markit’s Mr Williamson expects fourth-quarter eurozone business activity to take another major step backwards, with especially steep downturns in France, Spain and Italy.

However, overall optimism about the coming year improved in November with the composite future output index jumping to 60.4 from 56.5.

"Encouragingly, growth expectations have lifted higher, as vaccine developments fuel optimism that life can start to return to normal in 2021," Mr Williamson said.

“It’s anticipated that business and consumer spending will start to rise as the outlook brightens, though a high degree of caution is expected to persist for some time to come.”