Downturn deepens in Europe’s lockdown-hit services sector

Services companies in Italy and Spain suffered a fresh fall in activity last month as restrictions to contain the second wave of the coronavirus pandemic hit businesses, according to a widely watched business survey.

The IHS Markit flash services purchasing managers’ index dropped in both countries, with companies reporting sharp declines in demand and activity as a result of the pandemic, data released on Wednesday showed.

The Spanish index was slightly better than most economists expected but still fell 1 point to a five-month low of 41.4 in October. Italy’s index fell below expectations to a four-month low of 46.7, down from 48.8 in the previous month. 

A reading below the 50 mark indicates that a majority of businesses reported a contraction in activity from the previous month. The services sector accounts for about three-quarters of eurozone output and jobs.

“Worryingly, today’s data confirmed the deterioration of the bloc’s near-term outlook,” said Maddalena Martini, economist at Oxford Economics. “The worsening of the health situation and the reimposed restrictions will further impact the services sector.”

The results contrasted with other PMI data this week which showed activity continued to grow in Europe’s manufacturing sector, which is proving more resilient as supply chains have remained relatively unscathed and exports are rebounding. 

Many services companies, such as airlines, hotels, retailers and hairdressers rely on human contact, and so have been hit hardest by the restrictions on people’s social interaction and movement introduced to contain the spread of coronavirus.

In recent days, restaurants, bars, gyms, cinemas and theatres have been forced to close and night time curfews were imposed across much of Europe, while some countries such as France, Ireland and Belgium have told non-essential shops to close.

Even though the new restrictions are less strict than those introduced in the spring, they are still expected to cause another downturn in the eurozone economy which remains well below pre-pandemic levels despite rebounding strongly in the third quarter.

IHS Markit also revised up its services indices slightly for Germany, France and the eurozone from initial flash readings published two weeks ago. But despite the revisions, eurozone services PMI still fell to 46.9 in October, down from 48 in the previous month. 

The eurozone composite PMI — combining both services and manufacturing — was revised up from 49.4 to 50, but it remained down from 50.4 the previous month.

“Only in Germany has the strength of the manufacturing sector countered the renewed downturn in service sector activity, leading to increasingly polarised economic trends among the euro area’s member states,” said Chris Williamson, chief business economist at IHS Markit. “However, for all countries the outlook has grown increasingly dark.” 

In contrast with the gloomy European data, IHS Markit reported on Wednesday that services activity rose sharply in China, India and Australia — underlining how much of Asia has managed to rebound much faster from the pandemic than Europe.

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With the virus eating away at consumer confidence and causing a big drop in tourism, Spanish services companies reported their fastest declines in both activity and new business since May, squeezing profit margins and prompting them to cut more jobs. 

“Not surprisingly, the impact is greatest amongst hotels and restaurants where Covid-19 restrictions and a lack of domestic and international demand is having a severe and adverse effect on activity,” said Paul Smith, economics director at IHS Markit. 

It was an equally grim picture in Italy, where services companies reported that new business had declined at its fastest pace since June — hit by a drop in foreign demand — after eight consecutive months in negative territory. They cut jobs at the highest rate since July.

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