Europe’s economy risks new contraction from Covid-19 curbs

The resurgence of the coronavirus has knocked Europe’s economic recovery back a step and raised the possibility of another contraction.

IHS Markit’s monthly measure of business activity fell to a four-month low of 49.4 in October from 50.4 in September. Within the report is a clear divergent trend of manufacturing strength being offset by damage to services from the second wave of the pandemic.

New government curbs as well as consumer fears of the virus are driving the two-speed economy. In Paris and eight other major French cities, authorities introduced a curfew this month that’s hitting restaurants and bars particularly hard. In Germany, a Bavarian district imposed a two-week lockdown after infections climbed above a rate that triggers an automatic tightening of restrictions.

While the weakness is largely limited to services, the fallout on jobs and spillovers to the rest of the economy will worry policy makers. The deteriorating outlook strengthens the case for the European Central Bank(ECB) to pump more monetary stimulus into the economy, and governments may have to extend expensive aid programs.

IHS Markit warned that the euro-area economy could shrink again this quarter. Its report said employment fell again in October, confidence deteriorated and orders declined.

“While the overall downturn remains only modest, and far slighter than seen during the second quarter, the prospect of a slide back into recession will exert greater pressure on the ECB to add more stimulus and for national governments to help cushion the impact of Covid-19 containment measures,” said Chris Williamson, chief business economist at IHS Markit.

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