The IHS Markit Eurozone PMI Composite saw a noticeable bounce , experiencing its best level in the last three months. This was mainly led by Italy (3-month high), Germany (2-month high), France (3-month high), and shows encouraging signs that Eurozone economies bottomed in April, and the long projected economic recovery has in fact started.
The Services Business Activity Index is particularly impressive – it rose from a horrific, record-low of 12 in April, to 30.5, as the services sector opened up across European countries. The improvement is seen on the Final Services PMI, an index based on surveying purchasing managers in the services industry.
Challenges Ahead for the European Services Sector
The services sector is of particular importance for the European economy. As a service-based economic area, the developments in the industry affect the overall euro-zone GDP. The COVID-19 pandemic continued to restrict economic activity in May, and the new normal conditions dictated by social distancing norms pose great challenges for the sector moving forward.
Cuts to employment, lower fuel and energy prices, are some of the few challenges listed by managers in the services sector for the month of May. German businesses, in particular, were extremely pessimistic, although the overall degree of pessimism in the Eurozone decreased when compared to April.
The outlook for the services industry remains weak. After all, the PMI Services, while bouncing, show deep contractionary conditions for the sector. As household spending was hit by high levels of unemployment, corporate spending was subdued as a consequence.
Business activity throughout the sector is expected to rise in the period ahead, as countries are lifting lockdowns, and sentiment improves further. However, it is all depending on how the European countries manage to contain the rate of coronavirus infections. A resurgence of infection numbers is a major threat to any further possible recovery in the European services sector.
The European Central Bank (ECB) today is likely to acknowledge the improvements in the PMI data, albeit remaining cautious about further developments. The bank is expected to keep the refinancing rate steady at 0% while adding more easing via its PEPP (Pandemic Emergency Pandemic Programme).
An interesting out of May Markit data is that the GDP forecasters predict a 9% decline for the rest of 2020, a bit more optimistic than the ECB staff projections. The ECB communicated so far that it expects the GDP to shrink between 10% and 15% for 2020, and often its officials indicated that the data is likely to be somewhere in the middle of the range.