In Europe, Light At Tunnel’s End Still Just Faint Glimmer

The European economy is still in dire straits as countries tentatively exit shut-ins, but flash PMIs for May suggest April might have been the trough.

“The eurozone economy remained stuck in its deepest downturn ever recorded in May due to ongoing measures taken to control the coronavirus”, IHS Markit said Thursday. “However, the rate of decline eased as parts of the economy started to emerge from lockdowns”.

The regional composite and services gauges hit three-month highs after plunging to levels so low as to be largely meaningless in April.

To be clear, these prints are still horrific. 30.5 on the composite gauge is a record low outside the current context, for example. The pre-COVID nadir was 36.2 in February of 2009, one month before the onset of the longest bull market in history.

The European economy shrank the most ever in the first quarter and Q2 will obviously be much, much worse.

“The eurozone saw a further collapse of business activity in May but the survey data at least brought reassuring signs that the downturn likely bottomed out”, Markit’s Chief Business Economist Chris Williamson said Thursday. “Second quarter GDP is still likely to fall at an unprecedented rate, down by around 10% compared to the first quarter, but the rise in the PMI adds to expectations that the downturn should continue to moderate as lockdown restrictions are further lifted heading into the summer”. Consensus is looking for an even larger decline in Q2.

Germany and France are angling to take the first meaningful steps towards burden-sharing and the establishment of something that at least looks like fiscal unity via €550 billion in EU debt to finance a recovery fund for the bloc. That news helped equities stage a huge rally on Monday and also bolstered the single-currency.

Still, Williamson cautioned that a full recovery in Europe may “take several years”.

The ECB is doing its best to cushion the blow from the virus, but legal challenges to the original asset purchase program have raised uncomfortable questions about pandemic-specific QE at the worst possible time. The central bank says its programs will not be impeded by the German court ruling.

PMIs for Germany and France rebounded in May, but still betrayed a deep slump in activity. Services PMIs remain comically low.

Remember, the GDP data for the first quarter only captured a few weeks of the strictest lockdown measures. That means the already woeful country-level data is set to be unimaginably bad once the Q2 numbers are in the books.

“Given the sharp contraction in first quarter GDP caused by only two weeks in lockdown, the latest PMI data suggest that we are set for colossal reduction in economic activity during the second quarter”, IHS Markit’s Eliot Kerr remarked, commenting on the preliminary May PMIs for France.

Phil Smith, IHS Markit’s Principal Economist, summed things up in the color accompanying the release for Germany. “Any hopes of a swift pick-up in activity across the German economy following the easing of lockdown restrictions have been somewhat dashed by May’s flash PMI survey, which shows activity down again across both the manufacturing and service sectors”, he said.

And that, as they say, is that.


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