Eurozone: New Divergence

Since the summer, a new divergence has characterized the economic performance of the eurozone. Not only has there been a decoupling of the manufacturing and service sectors, but the manufacturing sector itself has also differed strongly across countries. And this divergence is here to stay for a while.

At the start of the pandemic, a large manufacturing sector was a clear negative for eurozone economies. Supply chain disruptions as well as (voluntary) closures of many industries were important drivers behind the economic slump during the first lockdown. Since the summer, the manufacturing sector has decoupled from services, which have continued to suffer from ongoing social distancing and new lockdowns. However, this decoupling at the eurozone level has masked significant differences across individual countries. From the summer months onwards, the manufacturing sectors of Germany and Italy were able to expand, while in Spain and France, the sector flirted with contraction. 

And the start of the year didn’t change this dynamic. The Italian PMI for the manufacturing sector increased to 55.1 compared to 52.8 in December, while the index for Germany remained firmly above the 55 level. This is in contrast to the developments in France and Spain. In France, the situation for the manufacturing sector improved slightly, while in Spain, the sector is again in contractionary territory.

Purchasing Managers Index by country

Drivers of divergence

The severity of the pandemic and the strictness of the lockdown measures can only do so much to explain the depth of the trough in April. The number of new infections (per million inhabitants) did start to increase during the summer months in France and Spain, which was not the case in Germany and Italy, however, this is more significant for the services sector and should have had only a limited impact on manufacturing.

Despite all talk about the pandemic as an accelerator of structural change, away from traditional manufacturing and business models towards digitalisation and services, a well-functioning export-oriented manufacturing sector is currently still a blessing.

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