The huge economic cost of the COVID lockdowns is becoming evident. European PMIs have collapsed to a level far below that recorded in the financial crisis in April and far, far worse than expectations, highlighting the difficulties in modelling the COVID shock. The historic decline in employment confirms fears over permanent scarring from the ongoing crisis, while the rapid decline in prices raises the likelihood of near-term deflation.
Depth of Decline in Europe Much Worse Than China
The 13.5 reading on Europe’s April composite PMI was less than half of the previous all-time low recorded a month earlier and significantly worse than the 27.5 low in China’s composite PMI recorded in February. As expected, services were hit harder than manufacturing with the 11.7 reading comparing with 33.6 on headline manufacturing. The output component of manufacturing (this excludes suppliers’ delivery times and inventories, which can mask underlying weakness) was much lower at 18.4 but still above that for services.
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The huge economic cost of the COVID lockdowns is becoming evident. European PMIs have collapsed to a level far below that recorded in the financial crisis in April and far, far worse than expectations, highlighting the difficulties in modelling the COVID shock. The historic decline in employment confirms fears over permanent scarring from the ongoing crisis, while the rapid decline in prices raises the likelihood of near-term deflation.
Depth of Decline in Europe Much Worse Than China
The 13.5 reading on Europe’s April composite PMI was less than half of the previous all-time low recorded a month earlier and significantly worse than the 27.5 low in China’s composite PMI recorded in February. As expected, services were hit harder than manufacturing with the 11.7 reading comparing with 33.6 on headline manufacturing. The output component of manufacturing (this excludes suppliers’ delivery times and inventories, which can mask underlying weakness) was much lower at 18.4 but still above that for services.
Europe’s collapse was broad-based, but Germany fared better than others with a composite reading of 17.1. France was lower at just 11.2 and the rest of the Euroarea was at 11.5. March data had shown the Italian PMI was by far the lowest in the region, with the lockdown there starting earlier than elsewhere. We expect the detailed April data to show a more even picture given the stringent lockdowns subsequently imposed elsewhere in Europe.
The UK PMI was very similar with the April composite index dropping to 12.9 (from 36.0 in March) and driven by services rather than manufacturing. The only firms seeing output increase were in medical equipment, online retail or those with large clients in online retail or public sector.
Chart 1: An Unprecedented PMI Collapse
Source: Bloomberg, Macro Hive
Employment Collapsed Even Excluding Furloughed Workers
Job retention schemes in place across Europe look to have done little to prevent large-scale job losses. The April employment decline was the largest ever recorded in the survey’s history, and even when excluding furloughed workers, the drop was still among the worst on record. Official unemployment data for the Euroarea are unlikely to reflect this for some months. Latest data are available only through February and, at 7.3%, this is the lowest since March 2008. The early 2013 high of 12.1% in Euroarea unemployment could be very quickly surpassed and the permanent scars from the COVID crisis run deep.
Pronounced Prices Declines Point to Deflation
Another sobering detail was prices. The steepest fall since April 2009 reflected a combination of discounting and lower costs, with services reporting the largest declines but manufacturing far from immune even despite some supply bottlenecks. Discounting will ease as businesses slowly increase capacity, and the price component should start to recover. But the very pronounced decline and continued slump in oil prices suggests deflation ahead.
While China’s PMI recovered sharply in March, we do not expect the same for the Euroarea. Restrictions are being lifted in several of the region’s largest economies, but governments are rightly acting with caution. May PMI readings will likely be above today’s historic lows assuming the easing proceeds as announced, but any resumption of business as usual remains months, or perhaps quarters, away.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)