This major European economy is growing again

The second biggest economy in the European Union returned to growth this month even as activity in the rest of the region continued to decline.

The $3 trillion French economy grew this month for the first time since February, as coronavirus restrictions were eased and domestic consumption ticked up, according to a closely-watched survey.

An initial reading of the country’s Purchasing Managers’ Index, which tracks activity in the manufacturing and services sectors, jumped to 51.3 in June from 32.1 in May. Readings above 50 indicate an expansion.

European Flags in front of the European Commission Headquarters building in Brussels, Belgium, Europe

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“France looks to be leading the pack somewhat, especially from a manufacturing sector perspective,” said Chris Williamson, chief business economist at IHS Markit, the company that publishes the survey of executives at private sector companies. The country is reaping the benefits of having companies that are more domestically focused, he told CNN Business.

“What we’re seeing in all economies is that any revivals in growth are being fueled by domestic demand,” Williamson said, pointing to the rebound in China as an example. “If you have an export oriented manufacturing sector, which is the case in Germany, it acts as a dampener,” he added.

French President Emmanuel Macron said in March that no French company, whatever its size, would be allowed to collapse because of the pandemic. The government will be spending close to $521 billion to help its economy recover, French finance minister Bruno Le Maire said in an interview with French radio RTL this month.

Europe’s largest economies further eased coronavirus restrictions in June, allowing many companies to reopen and driving improved demand for goods and services. The initial composite PMI for the countries that use the euro surged to 47.5 in June, from a record low of 13.6 in April and a reading of 31.9 in May.

“Broad economic activity across Europe seems to be better than we had expected for this stage of the recovery back in late March,” economists at Berenberg said in a note to clients.

Trucks make their way through the Port of Dover Ltd. in Dover, U.K., on Wednesday, May 27, 2020. The U.K. announced its post-Brexit tariffs regime, cutting import duties on many products while protecting industries such as automotive and agriculture, as the country turns its focus toward global trade beyond Europe. Photographer: Jason Alden/Bloomberg/Getty Images

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While output continued to fall in both manufacturing and services, the rates of contraction slowed significantly. Job losses also moderated, but headcounts at factories continued to fall.

“Output and demand are still falling but no longer collapsing,” said Williamson. “The rise in the PMI adds to expectations that the lifting of lockdown restrictions will help bring the downturn to an end as we head into the summer,” he added.

Still, Williamson cautioned that PMI readings around the 50 level merely show stabilization in the economy. “It’s not business returning to normal. Levels have been crushed compared to what they were before the pandemic hit,” he said.

EU GDP is still expected to suffer a steep decline in the second quarter, after the deepest contraction on record in the first three months of the year.

But the “sharp recovery” in PMI data suggests that GDP will not be as “catastrophically bad” as feared, said economists at Capital Economics. “Today’s data provide some reassurance that the economy is getting back on its feet. But with some restrictions still in place and fears of a second wave lingering, it will be some time before activity returns to pre-virus levels,” they said in a research note.

People have lunch at a restaurant near the Arc de Triomphe in Paris, France, on June 18.

Some businesses are still reporting weakened demand, as customers adopt a cautious approach to spending, according to IHS Markit.

Once companies have processed orders that were put on hold during lockdowns there may be insufficient new orders to keep operations going, Williamson said.

This picture taken on April 30, 2020, shows an Air France plane parked on the tarmac at Paris Charles de Gaulle Airport in Roissy, on the 45rd day of the novel coronavirus COVID-19. (Photo by BERTRAND GUAY / AFP) (Photo by BERTRAND GUAY/AFP via Getty Images)

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The challenge for governments will be to ensure that demand revives enough to enable companies to see through the downturn and keep staff, he added.

France is planing to extend its jobs support program by up to two years. Labor minister Muriel Pénicaud told Franceinfo radio earlier this month that the government is considering measures that allow people to work reduced hours partially paid for by the state.

The government has already pledged nearly $17 billion to protect the workforce in the country’s aviation industry, supporting the likes of Airbus (EADSF) and Air France (AFLYY), as well aerospace component suppliers Safran (SAFRF) and Thalès.

IHS Markit’s Williamson expects the European economy will take three years to recover.

— Sophie Stuber, Charles Riley, Ya Chun Wang and Benjamin Berteau contributed reporting.