Europe’s Economic Recovery Stumbles After Initial Bounceback

The euro-area economy unexpectedly lost momentum this month after a resurgence of coronavirus cases forced new restrictions, highlighting the challenge of rekindling growth while the pandemic remains untamed.

The sharp slowdown — driven by services — shows that the escape from recession won’t be plain sailing, and undermines lingering hopes for a V-shaped recovery. While infections are approaching levels recorded during strict lockdowns earlier this year, governments are so far reluctant to re-impose those measures.

In a report published Friday, IHS Markit said its composite measure of private-sector activity dropped to 51.6 in August from 54.9 in July. The manufacturing gauge remained virtually unchanged, but services plunged to 50.1, a level that practically signals stagnation.

The euro remained lower after the report and traded down 0.4% at $1.1814 at 10:48 a.m. Frankfurt time.

The economy had initially bounced back strongly after restrictions were eased, though concerns lingered that the pace could fade. At their last meeting in July, European Central Bank policy makers were reluctant to draw firm conclusions about the health of the economy, a stance that looks justified by Friday’s numbers.

The fallout on jobs in both sectors continued, with employment declining for a sixth straight month. That’s a key worry for governments, who fear a damaging rise in joblessness could persist. While France and Germany, the euro area’s biggest economies, continued to see growth in activity, the Markit report suggested output declined in Italy and Spain.

“The euro zone stands at a crossroads,” said Andrew Harker, economics director at IHS Markit. “The path taken will likely depend in large part on how successfully Covid-19 can be suppressed and whether companies and their customers alike can gain the confidence necessary to support growth.”

What Bloomberg’s Economists Say

“The decline in euro-area composite PMI for August will come as a slight disappointment to policy makers. Still, the balance remains consistent with continued, albeit slower, expansion.”

— Maeva Cousin. Read theEURO-AREA REACT

To rein in the spread of the virus, countries across the region have tightened some restrictions on public life. Spain and Italy shut discos, and Greece limited hours for bars and restaurants in hopes of avoiding more stringent measures after the holiday season winds down. Irish authorities are also considering new measures to curb the pandemic.

For thebattered travel industry, those steps already have consequences.Ryanair Holdings Plc, Europe’s biggest discount carrier, has cut back on schedules, saying the uncertainty has discouraged people from booking foreign trips.

Deutsche Lufthansa AG’s Eurowings unit said Tuesday it’ll reduce capacity to Spain, in response to a German travel warning. The country has re-emerged as a new hotspot for the virus.

Passenger numbers in Germany may take until 2024 to reach their 2019 level,according to industry association BDL.

German Chancellor Angela Merkel called on European leaders Thursday to work together to prevent renewed lockdowns.

“Politically, we want to avoid closing borders again at any cost, but that assumes that we act in coordination,” she said during a visit to Emmanuel Macron at his presidential residence on the Mediterranean coast.

Before the meeting, Macron hadtold Paris Match magazine that “we cannot shut down the country, because the collateral damage of confinement is considerable.” France reported4,771 new infections Thursday, the largest daily increase since mid-April.

— With assistance by Zoe Schneeweiss, and Simbarashe Gumbo

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