Eurozone Recession Risk Grows as Pandemic Chills Services

The eurozone economy faces a rising risk of sliding into its second recession since the pandemic first struck as high Covid-19 infection rates and government restrictions left its services sector mired in a fifth straight month of contraction during January.

The economy shrank in the final three months of last year, and another quarter of declining output would leave it further behind the U.S. and China in charting a recovery from the pandemic’s toll.

Surveys of purchasing managers compiled by data firm

IHS Markit

released Wednesday showed a steeper decline in services activity than in the final month of last year.

In China, a similar survey of service providers recorded a continued expansion in January but at the weakest rate in nine months, as a fresh outbreak in the north of the country was met with restrictions on the movements of millions of people.

Japan’s services sector contracted more sharply in January as rising infection rates prompted the declaration of a state of emergency in the capital city and neighboring prefectures.

But where the virus’s spread has been more contained, services activity has continued to rebound, with both India and Australia reporting steady growth. But even in those countries, the pace of the recovery was held back by weak overseas demand.

Similar surveys for the U.S. to be released later Wednesday are expected to show continued strong growth in the sector.

According to IHS Markit, the U.K. suffered the largest fall in services activity during January as new infections remained high and government restrictions were at their tightest since April.

The service sector’s Purchasing Managers Index fell to 39.5 in January from 49.4 in December. By comparison, the PMI for the eurozone’s service sector fell to 45.0 from 46.4 in December.

However, businesses reported an increase in optimism about their prospects over the coming year as the U.K. led other major economies in deploying Covid-19 vaccines. For service providers, widespread vaccinations offer the hope that restrictions on their operations will be eased and then removed, and that consumers will become less wary of going to the cinema, eating out or having their hair cut.

“The sector will remain in a parlous state until vaccination programs give customers the confidence to start spending again and allow room for the government to inject confidence into the economy by reducing Covid restrictions,” said

Duncan Brock,

group director at the Chartered Institute of Procurement & Supply, which helps compile the survey in the U.K.

The slower deployment of vaccines across the eurozone means that is a more distant hope, with the currency area’s economy likely to recover less rapidly than anticipated this year.

In recent years, purchasing managers indexes have become important indicators of where the global economy might be heading. But in the current slowdown, where small businesses were some of the hardest hit, PMI numbers may not be telling the full story. WSJ explains. Photo: Getty Images (Originally Published July 1, 2020)

Write to Paul Hannon at [email protected]

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