By Jonathan Cable
LONDON (Reuters) - The recovery in euro zone manufacturing activity gathered pace last month but it was largely driven by strength in powerhouse Germany, and rising coronavirus cases across the region may yet reverse the upturn, a survey showed.
While the manufacturing sector is enjoying something of a revival, most market watchers and policymakers will focus on a survey for the bloc's dominant service industry, which accounts for around two-thirds of GDP, due on Monday.
Its preliminary reading returned to contraction territory last month, suggesting renewed coronavirus-led lockdown restrictions were having an impact.
"If you look across the region, the fact is large numbers of services firms may no longer be viable in a world where we have a significant amount of COVID-19 restrictions in place and that means there could be a big employment shake out," said Peter Dixon at Commerzbank (DE:CBKG)."
Factories also cut headcount in September, albeit at a shallower pace than the previous month, and official data showed unemployment across the region rose to 8.1% in August.
As the pandemic raged across Europe governments imposed tough lockdowns. But as infection rates fell, many of those controls were removed.
However, a resurgence in cases has meant some restrictions have now been reimposed.
That resurgence is the biggest threat to the recovering euro zone economy, according to a Reuters poll of economists last month, who said growth and inflation are more likely to create negative surprises over the coming year than positive ones. [ECILT/EU]
"Second wave effects carry a lot of uncertainty about the growth environment though. A new round of more national lockdowns could have a serious impact on the labour market again, which is not our base case, but cannot be ruled out either," said Bert Colijn at ING.
Still, surging demand after the initial relaxation pushed IHS Markit's final Manufacturing Purchasing Managers' Index to 53.7 in September from August's 51.7, in line with an earlier flash reading and its highest level since August 2018.
Anything above 50 indicates growth.
An index measuring output, which feeds into the composite PMI due on Monday and is seen as a good guide to economic health, bounced to its highest since February 2018.
Earlier figures showed factory output in Germany, Europe's largest economy, was booming - in contrast to modest production growth in France and Spain and slightly slower growth in Italy.
Without Germany, output growth would have weakened to the lowest since June, IHS Markit said.
Growth also slowed in Britain, outside the currency union, and the pace of the bounce-back is expected to weaken further in coming months as the government scales back its job subsidies and seeks to clamp down on rising COVID-19 cases. [GB/PMIM]
But with overall demand at a 2-1/2-year high, euro zone factories built up a backlog of work. Meanwhile, optimism about the coming 12 months climbed to a level not seen since before the U.S.-China trade war escalation in early 2018.
The future output index rose to 63.8 from August's 61.5.