Euro zone economy moves towards slow recovery from record slump

The report sums up the situation for businesses across Europe, which are reopening after coronavirus restrictions. PHOTO: AFP

LONDON (BLOOMBERG) - The euro-area economy picked up from its record slump, but the good news on activity was tempered with a warning that the recovery will be protracted.

The June Purchasing Managers Index from IHS Markit showed an improvement at the region's manufacturers and service firms, and confidence at the highest since February. It also had plenty of reason for caution, with the headline number still signalling contraction, new orders declining and employment falling.

The report sums up the situation for businesses across Europe, which are reopening after coronavirus restrictions, but face weak demand and a far-from-normal situation. Even with a sharp rebound now, there's huge uncertainty about the longer-term implications of the virus. Social distancing, consumer worries and other disruptions mean full recovery will take time.

While furlough programmes prevented a sharp spike in unemployment during lockdowns, it's expected to increase in the coming months, further weighing on demand. German airline Lufthansa is cutting thousands of jobs, and France's Airbus SE is also seeking to reduce headcount.

"We remain very cautious of the strength and sustainability of any economic rebound," said Chris Williamson, chief business economist at Markit. "The job market remains a particular area of concern, especially if demand fails to pick up sharply in coming months."

The composite PMI for the euro zone rose to 47.5 in June from 31.9 in May. The number for Germany, Europe's largest economy, also improved, while the French index unexpectedly jumped above 50, the level that divides expansion from contraction.

Markit still expects the euro-area economy to shrink by more than 8 per cent this year - roughly in line with consensus - and said that momentum in the recovery could fade after an initial spurt. It could take up to three years for the region to regain its pre-pandemic level of GDP.

European Central Bank policymaker Francois Villeroy de Galhau has offered a similar view of the recovery, warning that the early pace won't last.

"If I had to give a shape to the recovery I'd say it's a half-V because we have climbed up very fast and we forecast we will continue to climb more gently," he said on RTL radio last week. "Fundamentally, it's a recovery in the form of a bird's wing."

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