- HS Markit's flash composite PMI for the euro zone, which looks at activity across both manufacturing and services, hit 52.5 in March versus 48.1 in February.
- The preliminary data points to the first economic expansion in the region since September and the largest increase since last July.
- But there are concerns about how the euro zone economy will perform in the second quarter as social restrictions are tightened in some nations.
LONDON — Business activity in the euro area expanded in March, according to preliminary figures on Wednesday, but economies are bracing for a third wave of Covid-19 infections which could derail any recovery.
IHS Markit's flash composite PMI for the euro zone, which looks at activity across both manufacturing and services, hit 52.5 in March versus 48.1 in February. A reading above 50 represents an expansion in economic activity.
The preliminary data points to the first economic expansion in the region since September and the largest increase since July.
"The eurozone economy beat expectations in March, showing a much better than anticipated expansion thanks mainly to a record surge in manufacturing output," Chris Williamson, chief business economist at IHS Markit, said in a statement.
Manufacturing has been the biggest driver of economic performance this month, but the services sector — the hardest hit by the pandemic — also experienced an improvement, hitting a seven-month high.
However, there are concerns about how the euro zone economy will perform in the second quarter as social restrictions remain a reality. Germany decided this week to extend its lockdown and imposed strict restrictions over the Easter weekend. In France, Paris and about 14 other regions have also been put in lockdown mode on the back of rising infections. Poland has also announced tougher movement restrictions.
"The outlook has deteriorated, however, amid rising COVID-19 infection rates and new lockdown measures. This two-speed nature of the economy will therefore likely persist for some time to come, as manufacturers benefit from a recovery in global demand but consumer-facing service companies remain constrained by social distancing restrictions," Williamson said.
The European Central Bank estimated earlier this month a GDP (gross domestic product) rate of 4% for the euro area this year and 4.1% for 2022. However, the forecast is dependent on the evolution of the pandemic and the pace of vaccinations in the region.
French activity improves
France announced Tuesday a more intense vaccination campaign going forward. Anyone over the age of 70 will be able to be vaccinated from Saturday onward and more vaccination centers will be developed to intensify the rollout starting next month.
The latest business activity data for the country came in at a three-month high, though still in contraction territory. France's flash composite output index stood at 49.5 in March, from 47.0 in February.
"Activity trended towards stabilization, reversing the downward momentum seen in January and February ... That said, there remain ongoing challenges related to the pandemic," Eliot Kerr, an economist at IHS Markit, said in a statement.
"Firstly, raw material shortages continued to drive costs sharply higher, which may act as a squeeze on profit margins until the recovery in demand conditions gathers pace. Secondly, the threat of setbacks to the reopening of the economy remains tangible," he said.
German manufacturing hits record level
Meanwhile, the German manufacturing sector keeps on delivering for Europe's largest economy. Germany's flash composite output index rose to 56.8 from 51.1 in February, representing a 37-month high.
The positive economic activity was supported by a record increase in manufacturing output, which reached 68.5 in March, a level not seen since April 1996.
"The sustained upturn in the factory sector has seen the manufacturing PMI reach unprecedented heights, with growth in global demand for German goods showing no signs of abating and businesses reporting that previously-delayed investments are now being realized," Phil Smith, associate director at IHS Markit, said in a statement.
He added, however, that supply chains are coming under pressure, which is increasing factory input costs at a rapid rate.