Europe's economy in freefall

The March PMIs gave a first piece of evidence that the euro area economy is heading for a steep recession. The service sector, which has so far borne the brunt of the virus containment measures, registered the sharpest fall in activity on record. The manufacturing sector - long the weak spot of European growth - on the face of it seems to have weathered the Chinese supply-chain disruptions and domestic lockdown measures a bit better. However, a closer look at the sub-indices reveals that the situation for manufacturing is worse than the headline index suggests. Supply-side disruptions are causing delivery times and stocks of purchased components to move in the opposite direction to what we usually expect in a downturn, artificially boosting the aggregate PMI. Hence, a look at sub-indices such as new orders reveals a more accurate picture of the state of industrial activity and here the outlook remains bleak.

Bad news also comes from the inflation and labour market front. Normally, more widespread supply-chain delays would see prices rise but it seems the negative demand effect is outweighing this. Average prices charged for goods and services fell for the first time since August 2016, registering the steepest decline since January 2010, as companies offered discounts to boost sales and reduce inventories and similar discounting was also reported in services. The unprecedented collapse in demand and business sentiment prompted the largest monthly cull in staffing levels since July 2009.

Overall, the March PMI points to a growth contraction of around 2% q/q. With many government containment measures stepped up in the past few days (e.g. in Germany and Italy) and production closures in industry and the important car sector only just starting to bite, further PMI declines in coming months seem likely to us.

Download The Full Flash Comment