Europe Economy

Euro zone business activity bounces back in July with strongest growth in 2 years

Key Points
  • In June, the region had already shown signs of a recovery.
  • A reading below 50 indicates an economic contraction.
  • However, the July number surpassed this threshold coming in at 54.8, indicating that economic activity grew for the first time since February. 
Andrey Rudakov | Bloomberg | Getty Images

The euro zone's business activity rebounded in July, according to preliminary data, as strict coronavirus lockdowns were further eased and more people returned to work.

In June, the region had already shown signs of a recovery with flash PMIs (Purchasing Managers' Index) hitting 47.5 — up from 31.9 in May. A reading below 50 indicates an economic contraction. However, the July number surpassed this threshold coming in at 54.8, indicating that economic activity grew for the first time since February. 

"Companies across the euro area reported an encouraging start to the third quarter, with output growing at the fastest rate for just over two years in July as lockdowns continued to ease and economies reopened. Demand also showed signs of reviving, helping curb the pace of job losses," Chris Williamson, chief business economist at IHS Markit which provides the data, said in a statement.

Firms in France led the recovery in the 19-member region, with both manufacturing and services reporting the best output growth in two-and-a-half years. France's flash composite output index (which measures both sectors) reached 57.6 in July, representing a 30-month high.

However, the are still concerns about the shape of the recovery in the region. Many euro zone countries have reopened their economies, but there are social-distancing measures in place and many firms are operating at reduced capacity to avoid a spike in cases. 

As a result, there are worries that unemployment levels will soar in the coming months as firms struggle to operate at pre-Covid levels. Governments will also likely end their financial support for companies to keep all their employees on the payroll. 

"The concern is that the recovery could falter after this initial revival. Firms continue to reduce headcounts to a worrying degree, with many worried that underlying demand is insufficient to sustain the recent improvement in output. Demand needs to continue to recover in coming months, but the fear is that increased unemployment and damaged balance sheets, plus the need for ongoing social distancing, are likely to hamper the recovery," Williamson, from IHS Markit, said.

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