Second Coronavirus Wave Destabilizes European Recovery

But fresh evidence suggests the second wave of infections is already interrupting Europe’s comeback from what was the deepest contraction the region has experienced in peacetime.

Data firm IHS Markit said Friday its composite Purchasing Managers Index for the eurozone fell to 49.4 in October from 50.4 in September. A reading above 50.0 indicates that activity is increasing, while a reading below points to a decline. The October measure indicates business activity fell for the first month since June.

“The survey revealed a tale of two economies, with manufacturers enjoying the fastest growth since early-2018, but intensifying Covid-19 restrictions took an increasing toll on the services sector,” said Chris Williamson, an economist at IHS Markit.

Similar surveys for the U.S. to be released later Friday are expected to show that activity continued to increase in October.

The eurozone economy is expected next week to report an 8% increase in gross domestic product for the third quarter, bouncing back from the 11.8% contraction of the three months through June.

However, that would still leave the eurozone economy smaller than before the pandemic, with this summer’s growth petering out and the second wave hitting businesses and workers that had barely recovered from the spring.

Maria Codina, a 24-year-old project manager at a hotel management company in Barcelona, has been furloughed since mid-March, when the first wave hit Spain and many hotels were forced to close.

“During the first months it was still manageable,” Ms. Codina said. “But as months went by it has become harder and harder. Sometimes I think about changing my job, but then I realize that every firm in the sector is struggling now.”

While growth will likely return if and when infections start to fall again and restrictions ease, it isn’t clear how long the hiatus may last, and how long it will take for Europe to return to pre-pandemic levels of output.

The longer that recovery takes, the greater the risk of long-term damage to an economy that already faces weak growth prospects as its population ages and innovation falters.

The International Monetary Fund last week said it expects the eurozone’s economy to contract by 8.3% this year before rebounding by 5.2% in 2021. The fund said those forecasts take account of the recent rise in infections and fresh government restrictions.

But Alfred Kammer, the IMF’s director for Europe, said the outlook would weaken if lockdowns similar to those imposed in April were to come into force.

“The downside risk is if this second wave is intensifying and needs more elaborate restrictions, and if these materialize, then this would seriously impact on the growth in 2021, in particular,” said Mr. Kammer.

Either way, the path back to the levels of activity recorded before the pandemic is set to be long, with the IMF forecasting that some countries won’t fully recover until 2023.

“This is, indeed, going to be a very long ascent,” said Mr. Kammer.

European policy makers are alert to the possibility that the recovery may stall.

“Since the rebound we saw over the summer, the recovery has been uneven, uncertain and incomplete and now risks losing momentum,” European Central Bank President Christine Lagarde said in a recent interview with Le Monde, a French daily newspaper.

There are other signs that the rise in infections is weakening the outlook for growth in Europe’s major economies. According to France’s official statistics agency, confidence among that country’s service provider—particular in hospitality and food service—has fallen sharply in October, down for the first time since April.

A survey of households by the European Commission found consumer sentiment fell to its lowest level since May, when some of the restrictions put in place to contain the pandemic’s first wave were being lifted.

“A double-dip has become a realistic scenario for the fourth quarter and the dip in consumer confidence only adds to those concerns,” said Bert Colijn, an economist at ING Bank.

Spain is one of the European economies that relies most heavily on face-to-face services—such as tourism, eating out and entertainment—where the risk of infection is high. Amid one of the largest second wave of infections in Europe, fresh restrictions on restaurants, bars and hotels have been a fresh blow to the country’s hospitality sector.

“These restrictions won’t last only 15 days,” said Nerea Collell, a 29-year-old manager at Toni Restaurant in Mataró, a town close to Barcelona. “If they linger for long I don’t know what we are going to do. I am very pessimistic about the near-term future.”

Ms. Collell said revenue has fallen by 70% since the new restrictions were introduced, and that the restaurant may soon have to furlough some of its 35 workers.

The chef and owner of Le Mazenay, a restaurant in the fashionable Marais district of Paris, has already taken that decision, telling two of his three workers to stay at home in the evenings, which entitles them to payment by the French government’s furlough scheme. New restrictions mean restaurants have to close at 9 p.m.

“We’re not like Anglo-Saxon countries,” said Denis Groison. “The French aren’t used to eating early.”

By contrast, the eurozone’s manufacturers continue to thrive, thanks in part to strong demand from overseas buyers. That was particularly true of Germany, where IHS Markit’s measure of factory activity was at a 30-month high.

Daimler AG, the company that makes Mercedes-Benz cars, experienced a sharp turnaround in the three months through Sept. 30, largely on the back of China’s voracious appetite for luxury sedans and SUVs.

“We expect 2020 sales to be clearly higher than the previous year,” said Harald Wilhelm, the company’s finance chief.

—William Boston contributed to this article.

Write to Paul Hannon at [email protected]