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European business activity in focus

Amsterdam’s canals empty and deserted during the government imposed quarantine due to the coronavirus pandemic.

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The state of the euro zone’s business activity is the main focus for European markets on Tuesday, with investors eager to digest the latest indication of the region’s economic health as it emerges from the coronavirus pandemic.

Flash purchasing manager’s index (PMI) data — measuring activity in both the services and manufacturing sector in the euro zone in June — will be pored over to see the extent to which euro zone countries are recovering from lockdowns across the region that effectively saw whole industries shut down.  The data is due at 09:00 a.m. London time.

In May,  business activity in the single currency area hit a three-month high, with the final composite PMI (which includes both manufacturing and services) coming in at 31.9, up from 13.6 in April. The 50-point mark separates contraction from expansion.

The consensus among economists is that the June data will show a further rebound in business activity; economists polled by Reuters expect the flash June PMI to come in at 42.4.

“The consensus expectations are generally in the low-to-mid 40s, so that’s still below the 50 mark that separates expansion from contraction, even if this would represent a rebound from last month’s numbers,” Deutsche Bank economists led by Jim Reid said in a note Tuesday.

However, they noted that “it’s worth being cautious with the PMIs at the moment, because they simply measure changes in activity versus the previous month, so can prove rather volatile when you have the sort of economic dislocation we’ve seen since the shutdowns.”

The Deutsche Bank analysts said that as economies continue to reopen and activity returns to more “normal” levels, it’s plausible that the data will move “well above” 50.

“In fact surely the risks are on the upside for today’s numbers given the low starting base and the re-openings across the board. It’ll be difficult to read through much on such an outcome though,” they added.

Economists from Daiwa Capital Economics also expect a further improvement in the PMI output indices.

However, they noted cautioned that “new orders will likely remain subdued and employment conditions challenging. As such, while the aggregate euro area composite PMI is forecast to edge higher in June, from 31.9 in May, it will remain firmly below the key 50 expansion/contraction level.”

The data Tuesday will build on other indications of the region’s economic wellbeing, or not. On Monday, flash consumer confidence data for the euro zone and wider European Union showed further improvement in June. Nonetheless, recent unemployment data painted a worrying picture, especially for young people.

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