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Euro zone in double-dip recession but optimism abounded in February

LONDON (Reuters) - The euro zone economy is almost certainly in a double-dip recession as COVID-19 lockdowns continue to hammer the services industry, but hopes for a wider vaccine rollout has driven optimism to a three-year peak, a survey showed on Wednesday.

FILE PHOTO: A woman walks next to a poster reading "The best team. With distance." in front of a BMW factory as the spread of the coronavirus disease (COVID-19) continues in Munich, Germany, December 9, 2020. REUTERS/Andreas Gebert/File Photo

IHS Markit’s final February Composite Purchasing Managers’ Index (PMI), seen as a good gauge of economic health, rose to 48.8 from January’s 47.8, above a flash reading of 48.1 but firmly below the 50 mark separating growth from contraction.

That increase was in large part due to near-record growth in manufacturing as factories in the 19-countries that use the euro have mostly remained open after restrictions were reimposed to curb high coronavirus cases. Governments have forced hospitality and entertainment venues to remain closed and encouraged citizens to stay at home.

“The small upward revision to the euro zone’s Composite PMI for February still leaves it consistent with another contraction in GDP in Q1,” said Jessica Hinds at Capital Economics.

The euro zone economy contracted in the first two quarters of 2020 and a Reuters poll of economists last month forecast it would do so again in Q4 and the current quarter, saying risks to the already weak outlook were skewed to the downside. [ECILT/EU]

They cited delays to the European Union’s vaccine roll-out, concerns about new coronavirus variants supporting current lockdowns, stalled economic activity and rising unemployment as serious threats.

The services sector in Germany, Europe’s largest economy, continued to suffer under an extended coronavirus lockdown while French business activity fell to a three-month low. The Spanish and Italian services sectors also saw activity shrinking again.

In Britain, outside the euro zone and the European Union, economic output stabilised after a sharp fall in January before, its PMI showed, just hours before finance minister Rishi Sunak is due to set out his economic plans for the coming year.

SERVICES STRIFE

A PMI for the euro zone’s dominant services industry, most affected by lockdowns, rose to 45.7 last month, ahead of January’s 45.4 and the 44.7 flash estimate but still well below breakeven.

Demand fell for a seventh month, despite firms cutting their prices, yet services businesses did increase headcount - albeit marginally - for the first time since last February, just before Europe felt the first wave of the initial pandemic.

The services employment index rose to 50.2 from 49.8.

The EU’s inoculation campaign has been marred by cuts in promised deliveries, rollout delays and some social resistance but there are expectations these will be ironed out and the composite future output index, which measures optimism, bounced to 67.0 from 64.2.

“The slow vaccine rollout and rising case numbers in France and Italy means that the lifting of restrictions is likely to be delayed, pushing much of the vaccine-related bounce in activity into Q3,” Hinds said.

Reporting by Jonathan Cable; Editing by Catherine Evans

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