Economic Recoveries in U.S., Europe Take Diverging Paths

Date: Monday, July 27, 2020
Source: The Wall Street Journal

European countries could be benefiting from strict lockdowns pursued in spring and policies regarding mask wearing, social distancing, large gatherings

 

The U.S. economy lagged in July and Europe’s bounced back, according to fresh surveys of purchasing managers, evidence that the two economic powerhouses are recovering at different speeds from the coronavirus pandemic.

In the U.S., output in the service sector shrank for the sixth consecutive month as companies faced a wave of coronavirus cases that prompted new restrictions in several states. Manufacturing output expanded for the first time since February as new orders ticked up. Overall, economic activity in the U.S. was unchanged.

The divergence between the U.S. and Europe suggested that European countries could be benefiting from the strict lockdowns they pursued in the spring, as well as current policies regarding mask wearing, social distancing and bans on large gatherings. Most European countries are seeing just several hundred cases of new infections a day, compared with several thousand at the peak of the crisis. In contrast, the surge in infections in the U.S.—which has recorded more than a quarter of world-wide cases—is holding the recovery back.

Data firm IHS Markit said Friday its U.S. composite purchasing managers index—a measure of manufacturing and service-sector activity—rose to 50 from 47.9 in June, indicating that activity had flattened after five months of contraction. A level below 50.0 points to a decline in activity from the previous month, while a reading above that threshold points to an increase.

The data was weaker than economists had expected and suggested the U.S. economy was struggling to fire up its economy as many states continue to be hampered by coronavirus flare-ups. On Thursday, the total number of cases in the U.S. surpassed four million, just two weeks after reaching three million, with Florida, California and Tennessee reporting single-day records in deaths.

Several states—including California and Texas—have rolled back plans for reopening in the face of a resurgence of cases, forcing many restaurants and stores to shut down again shortly after reopening.

“While the stabilization of business activity in July is welcome news, the lack of growth is a disappointment,” said Chris Williamson, IHS Markit chief business economist. “Many companies, notably in consumer-facing areas of the service sector, linked falling sales to reimposed lockdowns.”

In Europe, IHS Markit’s index surged to 54.8 from 48.5 in June, indicating that activity increased at the fastest pace in more than two years after four months of contraction.

The strength of Europe’s rebound could lay the groundwork for a recovery in the remainder of the year and could push the global economy to expand in the three months through September, having contracted sharply in the second quarter as lockdowns stilled businesses around the world.

So far, Europe hasn’t experienced the same resurgence in the virus as in the U.S., allowing its economic recovery to proceed at a rapid pace. France, for instance, endured some of the strictest limits on movement and saw very large declines in its PMIs during lockdown, particularly in its services sector. In July, its composite PMI jumped to a 30-month high of 57.6, from 51.7 in June.

But new outbreaks in some places and the fresh imposition of more localized restrictions make it uncertain exactly how rapidly activity will return to the levels seen before the pandemic.

“What we found [in Europe] is that as the outlets start to open, the business starts to flourish again,” said Coca-Cola Chief Executive James Quincey this week. “We are social creatures as humans and we like experiences. People will want to go out. There will be habits that will have changed, but we will go out and experience the world.”

Staffing giant Randstad Holding NV on Tuesday reported a 25% fall in second-quarter revenue, but said that momentum had improved in recent weeks across its European operations, a contrast with the U.S.

“It’s been gradual, up and down, open and close,” Chief Executive Jacques van den Broek said of the U.S.’s recovery. “It’s definitely not getting worse, but it’s not like the steeper thing that we see in Europe.”

Swiss engineering giant ABB on Wednesday reported a 14% fall in second-quarter revenue and said it remained difficult to draw big conclusions on how orders would recover, with many countries facing continuing or new restrictions that could have long-term economic consequences.

“A lot of uncertainty remains, and we still expect some challenging quarters ahead,” said Chief Executive Bjorn Rosengren. “It’s correct that the U.S. is the challenging part of the market. We are down 23% there, which is, of course, significantly more than both Europe and Asia at the moment.”

The surveys included several worrying signs. In the U.S., service-sector firms—which have been particularly hard hit by the pandemic-related recession—reported a decline in new orders, while curbs on overseas travel held down foreign demand. Hiring ticked up in service-sector firms, however, a possible cause for optimism.

The surveys also indicated that while European businesses reported a pickup in new orders, those from overseas customers were still falling. Travel and tourism, which play a big role in the economies of Southern Europe, also remain subdued as restrictions remain in place on who can visit the continent.

“We work a lot with tourists and only a few Europeans have come back so far,” said Rita Indaco, co-owner of wine bar and restaurant Masto in Rome, who said she was 60% to 70% under her normal level of business. “But there are no Americans, which for us were very important, and other nationalities such as the Australians.”

Spain is currently Europe’s largest market for air travel, but traffic is down 32% from January’s prepandemic levels. That compares with shortfalls of 10% in China and 44% in the U.S., according to consulting firm OAG.

As in the U.S., some cities have been put back into lockdown as infections have risen, including Barcelona. That potential fate worries many business owners in Europe.

“People are scared about the future,” said Stefania Del Poeta, owner of a homeware shop in Rome’s Testaccio market. “They fear there will be another lockdown. And it will be terrible if it happens.”

There are signs that consumers are troubled by the twin threats of infection and unemployment. A survey by the European Commission released Thursday showed consumer confidence fell in July, leaving sentiment well below its prepandemic levels.

“The path of recovery crucially depends on the fear of infection,” said Jonathan Haskel, an interest-rate setter at the Bank of England. “It also depends on the fear, or realization, of unemployment.”

 

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