Euro Macro: PMIs point collapsing GDP and surging unemployment – After the eurozone PMIs plummeted in March, they dropped even further in April. The services activity index dropped to a record low of 11.7, down from 26.4 in March. The manufacturing output index also dropped to a record low of 18.4, down from 38.5 previously. As a result of the declines in services and manufacturing, the composite PMI (which tends to track overall GDP growth relatively well) dropped to 13.5, down from 29.7 the month before. When assessing these record low levels of the PMIs it is important to note that the indices are calculated as diffusion indices. For each variable, the index is the sum of the percentage of ‘higher’ responses and half the percentage of ‘no change’ responses. Therefore, the indices vary between 0 and 100, with a reading above 50 indicating an overall increase compared to the previous month, and below 50 an overall decrease. Therefore, the drop in the PMIs in April is a reflection of the abrupt (and unique) disruption in economic activity in April, compared to March due to the fact that the lockdowns related to the spreading of the coronavirus started around the middle of March in the vast majority of the eurozone countries. Due to this unprecedented nature of the economic contraction, the relationship between the level of the PMI and the level of GDP growth (which normally works quite well) is less straightforward then in normal times. Still, according to the written statement by Markit, at its current level, the composite PMI would be consistent with GDP contracting by 7.5% on a quarterly basis.
The details of the eurozone PMI report revealed an unprecedented sharp drop in the employment component of the composite PMI (to a record low of 33.4, down from 42.2 in March). Even though part of the drop in employment could be temporary in nature, the drop in the employment PMI suggests that the unemployment rate will jump higher in the coming months. Indeed, the PMI report mentions that ‘in some cases, the employment decline reflected furloughed workers, but even if these workers are excluded the fall in employment was still among the steepest ever recorded by the survey’. The level of the employment PMI is consistent with a 3-month change in the unemployment rate of a full percentage point – see chart above. The labour market is unlikely to continue to deteriorate at this sharp pace in the second half of the year, but we do expect ongoing rises in unemployment through this year and next. The likely sharp rise in unemployment is one of the factors that will likely continue to weigh on the economy even after lockdowns end. As such, we remain of the view that a durable recovery in the economy will not come before next year. (Aline Schuiling)