Coronavirus threatens manufacturing comeback in the eurozone

Euro-area factories saw the first clear signs of the coronavirus hitting their business in February, with widespread delivery delays and steep declines in foreign orders.

The epidemic, which has spread to the European continent after emerging in China late last year, is threatening to halt a much-awaited gradual recovery in manufacturing. It could also test the ability of the European Central Bank and euro-area governments to respond with fiscal stimulus.

An IHS Markit survey showed that lead times for the delivery of inputs lengthened for the first time in a year, mainly as a result of factory closures in China. To meet orders, companies reduced inventories at the pace rarely seen over the past decade. They also pulled back from buying.

“The concern is that coronavirus-related delays in shipments threaten to constrain production in the coming months,” said Chris Williamson, an economist at IHS Markit. That could prolong “a downturn that already extends to over a year.”

The virus-related disruptions come just as the euro area’s factory downturn was starting to ease. While still indicating contraction, IHS Markit’s Purchasing Managers’ Index for manufacturing rose to the highest level in a year. At 49.2, it was slightly above an initial estimate.

In February, investment-goods producers saw the weakest performance; consumer goods grew modestly. Output continued to fall in Germany but reached its highest level in more than a year. The situation worsened in France and Italy.

With the spread of the coronavirus showing no signs of abating, Bundesbank President Jens Weidmann said on Friday the outbreak will almost certainly weigh down growth in Europe’s largest economy. Yet he also echoed comments from ECB President Christine Lagarde that no monetary-policy response was needed for now.

Workers returning to factories in China could help ease supply constraints, according to IHS Markit. But manufacturers remain vulnerable as they face deflationary pressures from weak sales and stiff competition.

“Any further spreading of the COVID-19 epidemic risks driving increased risk aversion and a reduction of spending by both businesses and consumers,” said Williamson.

–With assistance from Harumi Ichikura and Mark Evans.