Global Business Downturn Shows Signs of Easing as Lockdowns Loosen

A worker prepares a store on the reopening day at Galleria Vittorio Emanuele II, in Milan, Italy, on May 18, 2020, as Italy eases some of the lockdown measures put in place during the COVID-19 outbreak. Flavio Lo Scalzo/Reuters

Business activity in Europe and Japan, as measured by purchasing managers index (PMI) data, declined for the third straight month because of COVID-19 restrictions, although at a slowing pace, reflecting a gradual economic pickup as lockdowns begin to be lifted.

“The eurozone saw a further collapse of business activity in May, but the survey data at least brought reassuring signs that the downturn likely bottomed out in April,” said Chris Williamson, chief business economist at IHS Markit, which released its PMI survey of eurozone business activity on May 20 (pdf).

Lockdowns during the outbreak were by far the most commonly cited cause of falling output, the report said.

According to IHS Markit, the eurozone composite PMI, which measures private sector business activity, rose to 30.5 in May from 13.6 in April. Readings below 50 indicate a contraction in activity, with a lower number reflective of a deeper plunge.

A restaurant employee stands at the Galleria Vittorio Emanuele II as Italy begins a staged end to a nationwide lockdown in Milan, Italy, on May 4, 2020. Flavio Lo Scalzo/Reuters

All eurozone countries eased their containment measures in May, accounting for the rebound in business activity.

Yet even amid expectations for further loosening of restrictions, some are expected to remain in place until a vaccine is found, putting a damper on the pace of economic recovery.

“Demand is likely to remain extremely weak for a prolonged period, putting further pressure on companies to make more aggressive job cuts as government job retention schemes expire. We therefore expect GDP to slump by almost 9 percent in 2020 and for a full recovery to take several years,” Williamson said.

Japan’s composite PMI reading, according to a separate au Jibun Bank/IHS Markit release, rose slightly to 27.4 from 25.8 in April, driven by a pickup in services. Manufacturing, however, saw a further decline, with the Flash Manufacturing Output Index slumping to 31.7 in May, compared to 34.7 in April.

“Latest PMI data provide yet another shocking insight into the devastating impact of the COVID-19 outbreak,” said Joe Hayes, IHS Markit economist.

“As Japan eases the state of emergency measures, the services economy can begin its gradual recovery,” he said. “However, the damage to the manufacturing sector could continue to worsen as global trade conditions deteriorate and the global economic recovery is slow.”

Shoppers at a supermarket in Tokyo, Japan, on March 27, 2020. Issei Kato/Reuters

Britain’s business activity numbers, according to a separate IHS Markit report (pdf), indicate a further sharp drop in output, although an improvement over April.

The Flash UK Composite Output Index rose to 28.9, a two-month high, compared to 13.8 in April. Manufacturing fared better, with the Flash UK Manufacturing PMI hitting 40.6 in May, compared to 32.6 in April.

“An improvement in business confidence about the year ahead for a second successive month is welcome news, and the easing of restrictions in coming months should help boost activity in some sectors as we head into the summer,” Williamson said.

“However, the UK looks set to see a frustratingly slow recovery, given the likely slower pace of opening up the economy relative to other countries which have seen fewer COVID-19 cases,” he said, adding that Brexit uncertainty was likely to exacerbate the virus-related restrictions and job insecurity.

Police officers in Waterloo station during the morning rush hour following the outbreak of COVID-19, in London, on May 19, 2020. Toby Melville/Reuters

Germany’s business activity numbers across the board hit two-month highs (pdf), although both the composite and the discrete services and manufacturing PMI and other indexes printed below 50.

“The rate of decline in activity has eased considerably since the peak of virus containment measures in April, but we are still a long way off business as usual, and the path to recovery remains unclear,” said Phil Smith, principal economist at IHS.

France hit a three-month high in its composite index, which hit 30.5 in May compared to 11.1 in April. Manufacturing lifted to 40.3 in May, from 31.5 in April, a two-month high.

“As anticipated, the latest France Flash PMI results pointed to a much slower contraction in business activity during May, with some companies reopening as lockdown measures are cautiously pared back,” said Eliot Kerr, IHS economist.

Still, he noted that the sharp contraction in first-quarter gross domestic product (GDP) in France after just two weeks of lockdown suggests that “we are set for colossal reduction in economic activity during the second quarter.”

The contraction in output will hit its lowest point in the second quarter across the globe, economists widely predict, with the Congressional Budget Office projecting a 37.7 percent quarterly plunge in Q2 GDP in the United States, seasonally adjusted and annualized.

However, the third quarter is expected to show a sharp rebound of 21.5 percent, which White House economic adviser Larry Kudlow on May 20 said would make it “the biggest growth quarter in American history.”